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19. Call Ratio Backspread
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Scenario:
This trader notices the low implied volatility of the options. The expectation now is for the Eurodollar market to rally. But, the trader does not want to lose money if the market moves the other way. A strategy that fits this outlook fairly well is the call ratio backspread.
Specifics:
| Underlying Futures Contract: | March Eurodollar | |
| Futures Price Level: | 90.00 | |
| Days to Futures Expiration: | 60 | |
| Days to Options Expiration: | 40 | |
| Option Implied Volatility: | 14.6% | |
| Option Position: | Short 1 Mar 90.00 Call | + 0.19 ($475.00) |
| Long 2 Mar 90.25 Calls | - 0.09 ($225.00) x 2 | |
| + 0.01 ($ 25.00) |
At Expiration:
| Breakeven: | 90.49 (90.25 strike + 0.25 difference between strikes - 0.01 credit). |
| Loss Risk: | Limited to 0.24 ($600); occurs only at 90.25 strike. |
| Potential Gain: | Unlimited; gains mount as futures rise above the 90.49 breakeven point. |
Things to Watch:
The worst situation would be a slow drifting of the price up toward the strike of purchased calls. Increased volatility helps this position, so the trader wants large upward price moves.
Follow-up Trading Strategies
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Contents Courtesy of CME.com