Call Ratio Vertical Spread
Components
Long one ITM call option and short two OTM call options.
Risk / Reward
Maximum Loss: Unlimited on the upside and limited on the downside.
Maximum Gain: Limited to the difference between the two strikes less the net premium paid.
Characteristics
When to use: When you are bearish on volatility and neutral on market direction.
Even though a Call Ratio Vertical Spread is the reverse of a Call Backspread, it is generally not referred to as being short a Call Backspread as a Call Ratio Spread requires up front payment and is hence a long strategy.
You will notice that it is very similar to a Short Strangle except the risk is limited on the downside.
Comments (4)
Admin
August 28th, 2008 at 3:04am
Mmm, yep, that was careless. I've made the change as indicated.
I will now review the others for any errors.
Thanks.
Nitesh
August 25th, 2008 at 6:48am
Hi,
I agree. But under Maximum Gain it could not be "Limited to the premium Paid". Paying a premium is not a gain.
I guess Maximum Gain would be Difference between the two strike prices less the net premium paid
Admin
August 25th, 2008 at 6:24am
Hi Nitesh,
That's right...it will depend how far apart the strikes are what prices you pay/receive for each option.
Having said that, for consistency I've changed the max gain to be limited to premium "paid". I think now it keeps it in line with the comparison to a Backspread.
What do you think?
Nitesh
August 25th, 2008 at 6:00am
Hi,
I am not very clear with this strategy. Under Maximum Gain: You say that the Gain is limited tp the premium received and under characteristics you say that Call Ratio spread requires up front payment ( I assume you mean that the premium received by selling two OTM call option is less then buying ITM Call option).
I am a little unclear about the up front payment. Please clarify?
Thank you
Add a Comment