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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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