"The best traders I've worked with understand that Technical Analysis is a lagging indicator derived from the Fundamentals. They also realize that Fundamentalists must heed the Technicals, for it is the only way to be sure of what the rest of the market is doing. A balanced approach to trading is just as important as a balanced approach to your overall portfolio investments."
– Craig Turner
Futures & Options Broker
17. Ratio Call Spread
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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
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