Call Ratio back spread is extremely bullish strategy that expects high volatility in the stocks. It requires sharp upward move in the stock.
Call Ratio Back spread is a bullish strategy that is formed by Selling 1 lot ATM Call and Buying 2 lots OTM call. The net cost to establish the strategy is very low, as it involves selling of one option and buying of two cheaper options. Maximum Profit is unlimited if the stock moves above higher strike call. Maximum loss is difference between the two strikes plus net outflow or less net inflow.
The reduced cost of formulating the strategy. In scenario where implied volatility of call is rising, it provides limited risk and generates high return in scenario where stock gives exponential move in the desired direction. Loss could be higher if the stock doesn’t give desired move. Not meant for an intermediate trader. Time decay could be harmful to the strategy as we are net long. The right strike selection is a key factor for success of this strategy.
Consider a call ratio backspread where Nifty Futures Fair value is quoting at 17,558, trader shall
Buy 17800 8 Sep 2022 CE at 80.80 (2 lots)
Sell 17550 8 Sep 2022 CE at 184.85
It’s a net credit strategy with premium inflow of about Rs 1,163, as also indicated in the tool of Quantsapp. The expiry payoff is indicated in orange colour. Expiry BEP1 of the strategy is at 17,573 and Expiry BEP2 is at 18,027.
The loss occurs above expiry BEP1 and peaks close to strike price of the other legs of the strategy of about Rs 11,174; while the maximum profit of the Nifty option strategy on expiry is unlimited and depends on how high the underlying Nifty moves.