Investment Type: Credit/Debit
Strike Prices: OTM for bought leg, ITM for sold leg
Expiration Month: Same expiration month between sold leg and bought leg, preferably current month
Composition: Sell Call (less contracts) + Buy Call (more contracts)

 
  Call Ratio BackSpread Profile Chart  
 

 
Description:

 

Call Ratio Backspread is the opposite of Ratio Call Spread. It is an interesting strategy because if we are able to pull off a net credit from the trade, then we will able to achieve uncapped rewards and if market goes against us, we still profit from the net credit. However we suffer loss if the stock moves sideways.

 

The process with this strategy is that we Buy OTM Call, then we try to offset the cost needed with Sell ITM Call. But make sure that the number of contracts for sold leg is smaller than bought leg. Common ratios are 1:2 and 2:3 (1:3 and 1:4 will lower the risk and shift the breakeven point). It’s essential that the maximum risk is still within the rule of our money management.

 
  Example  
 

 

Entry:


Maximum Initial Investment = $5,000 (or based on 5% money management rule)

Stock Price :
$34.00
   
Buy/Sell :
Sell
    
Strike Price :
32.5 Call
 } Premium: $2.15
Expiration Date :
December
No of Contracts :
25
    

 

Stock Price :
$34.00
   
Buy/Sell :
Buy
    
Strike Price :
35 Call
 } Premium: $0.80
Expiration Date :
December
No of Contracts :
50
    

 

Investment @ Entry = (Premium of Sold Leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) = ($5,375) + $4,000 = Credit ($1,375)

 

Breakeven Point Down = Strike Price of Sold Leg (lower strike) + Net Credit = $32.50 + $0.55 = $33.05


Breakeven Point Up = Strike Price of Bought Leg (higher strike) + (spread difference/cont of Bought Leg – cont of Sold Leg) + Net Debit (or – Net Credit) = $35.00 + ($2.5/1) – $0.55 = $35.00 + $1.85 = $36.85

 

Exit:

 

Best Case Scenario:

Stock Price :
$40.00 up $6.00
    
Buy/Sell :
Sell
    
Strike Price :
32.5 Call
 } Premium: $7.50
Expiration Date :
December

 

Stock Price :
$40.00 up $6.00
    
Buy/Sell :
Buy
    
Strike Price :
35 Call
 } Premium: $5.00
Expiration Date :
December

 

Profit @ Exit = (Premium of Sold Leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) - Investment @ Entry = ($18,750) + $25,000 – ($1,375) = $7,625

 

Return of Investment = Profit @ Exit / Investment @ Entry = 517%

 

Worst Case Scenario : (Difference between Strike Prices – Net Credit) x No of Contracts

 

Stock Price
Profit/Loss
ROI

30.00

1375

100%

32.50

1375

100%

35.00

-4875

-355%

37.50

1375

100%

40.00

7625

555%

42.50

13875

1009%