Call Ratio Backspread
The Call Ratio Backspread is also known as the Ratio Spread an the reverse call ratio spread. This is a bullish position that involves selling a call option and simultaneously buying more call options of the same stock at a higher strike price but the same expiration date. This option strategy produces a limited risk, unlimited reward profit potential. This strategy is specifically looking for a quick move to the upside in the immediate term.
Composition
Sell 1 ITM(In The Money) call option and buy 2 OTM(Out The Money) call options. Ends in a net credit position.
Risk / Reward
Max Reward: Unlimited upside potential and limited on the downside potential.
Max Risk: Limited to the difference between the two strikes plus the net premium (which should always be a credit for this trade).
Characteristics
The call ratio backspread is similar to a Short Straddle except the loss on the downside is limited.
Best used when trader is bullish on volatility & market price and movement is expected to be quick. By looking at the risk profile above, note that you profit when prices fall as well, although the major gains are if the market rallies.
A Ratio Backspread looks a lot like a Long Straddle except the payoff flattens out on the downside. Another important difference is that Call Ratio Backspreads are usually done at a net credit. That is, the net difference for both legs means that you will be receiving money into your trading account up front instead of paying (debit) for the spread put on.
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