17. Ratio Call Spread

Scenario:

This trader finds current implied volatility at relatively high levels. Analysis of this market leads this trader to conclude that British Pound futures will trend very slowly up to about $1.60/pound. Also, there is a small chance that the pound may fall dramatically. The trader, therefore, likes the risk/reward profile of the ratio call spread with this outlook.

Specifics:
Underlying Futures Contract:	June British Pound
Futures Price Level:	1.5800
Days to Futures Expiration:	35
Days to Options Expiration:	25
Option Implied Volatility:	14.1%
Option Position:	Long 1 Jun 1.5800 Call	- 0.0232 ($1450.00)
	Short 2 Jun 1.6000 Calls	+ 0.0146 ($ 912.50) x 2
		+ 0.0060 ($ 375.00)

At Expiration:
Breakeven:	1.6260 (1.6000 strike + 0.02 difference between strikes + 0.0060 credit).
Loss Risk:	Unlimited; losses continue to mount as futures rise above 1.6260.
Potential Gain:	Maximum gain of 0.0260 ($1625.00) peaks at 1.6000 strike.

Things to Watch:

Do not enter into this position when there is a chance of an explosive upward move. In this particular situation, a profit is realized if futures fall. However, depending on the strikes chosen, a small loss may also occur.

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