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17.  Ratio Call Spread

MENU - Futures Strategy Guide

Contents Courtesy of CME.com

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.

Follow-up Trading Strategies

ratio call spread: follow-up trading strategies

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MENU - Futures Strategy Guide

Contents Courtesy of CME.com