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Bullish

Call Ratio Vertical Spread

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

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