This is one of the basic strategies as it involves entering into one position i.e. buying the Call Option only. Any investor who buys the Call Option will be bullish in nature and would be expecting the market to give decent returns in the near future.
As the name suggests, a ratio of 2:1 is followed i.e. buy 1 ITM Call and simultaneously sell OTM Calls double the number of ITM Calls (In this case 2). This strategy is used by trader who is neutral on the market and bearish on the volatility in the near future. Here profits will be capped up to the premium amount and risk will be potentially unlimited since he is ..
Upper Breakeven Point = Strike Price of Short Calls + (Points of Maximum Profit / Number of Uncovered Calls), Lower Breakeven Point = Strike Price of Long Call +/- Net Premium Paid or Received
LONG CALL Vs RATIO CALL SPREAD - When & How to use ?
LONG CALL
RATIO CALL SPREAD
Market View
Bullish (Any investor who buys the Call Option will be bullish in nature and would be expecting the market to give decent returns in the near future.)
Neutral
When to use?
This strategy work when an investor expect the underlying instrument move in upward direction.
This strategy is used by trader who is neutral on the market and bearish on the volatility in the near future. Here profits will be capped up to the premium amount and risk will be potentially unlimited since he is selling two calls.
Action
Buying Call option
Buy 1 ITM Call, Sell 2 OTM Calls
Breakeven Point
Strike price + Premium
Upper Breakeven Point = Strike Price of Short Calls + (Points of Maximum Profit / Number of Uncovered Calls), Lower Breakeven Point = Strike Price of Long Call +/- Net Premium Paid or Received
LONG CALL Vs RATIO CALL SPREAD - Risk & Reward
LONG CALL
RATIO CALL SPREAD
Maximum Profit Scenario
Underlying Asset close above from the strike price on expiry.
Strike Price of Short Call - Strike Price of Long Call + Net Premium Received - Commissions Paid
Maximum Loss Scenario
Premium Paid
Price of Underlying - Strike Price of Short Calls - Max Profit + Commissions Paid
Risk
Limited
Unlimited
Reward
Unlimited
Limited
LONG CALL Vs RATIO CALL SPREAD - Strategy Pros & Cons
LONG CALL
RATIO CALL SPREAD
Similar Strategies
Protective Put
Variable Ratio Write
Disadvantage
• In this strategy, there is not protection against the underlying stock falling in value. • 100% loss if the strike price, expiration dates or underlying stocks are badly chosen.
• Unlimited potential loss. • Complex strategy with limited profit.
Advantages
• Less investment, more profit. • Unlimited profit with limited risk. • High leverage than simply owning the stock.
• Downside risk is almost zero. • Investors can book profit from share prices moving within given limits. • Trader can maximise profit when the share closes at the upper breakeven point.
