Call Ratio Backspread

What is ‘Call Ratio Backspread’

A very bullish investment strategy that combines options to create a spread with limited loss potential and mixed profit potential. It is generally created by selling one call option and then using the collected premium to purchase a greater number of call options at a higher strike price. This strategy has potentially unlimited upside profit because the trader is holding more long call options than short ones.

Explaining ‘Call Ratio Backspread’

An investor using this strategy would sell fewer calls at a low strike price and buy more calls at a high strike price. The most common ratios used in this strategy are one short call combined with two long calls, or two short calls combined with three long calls. If this strategy is established at a credit, the trader stands to make a small gain if the price of the underlying decreases dramatically.

Further Reading

  • Analysis of stochastic orders derived from Economy – [PDF]
  • Analysis of stochastic orders derived from economy/estudio de ordenaciones estocásticas derivadas de la economía – [PDF]
  • Hedging against a Price Rice Using Vertical Ratio Call Back Spread Strategy Formed by Barrier Options – [PDF]
  • Inverse vertical ratio put spread strategy and its application in hedging against a price drop – [PDF]
  • Hedging against a price drop using the inverse vertical ratio put spread strategy formed by barrier options – [PDF]