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Home / Education / Futures & Options Strategy Guide / Ratio Call Spread

Ratio Call Spread

Overview

Pattern evolution:
Ratio Call Spread

Learn 21 futures and options trading strategies in this complimentary,  easy-to-read guide. Download Now >>

When to use: Usually entered when market is near A and user expects a slight to moderate rise in market but sees a potential for sell-off. One of the most common option spreads, seldom done more than 1:3 (two excess shorts) because of upside risk.

Profit characteristics: Maximum profit, is equal to B – A – net cost of position (for call-vs.-call version), realized if market is at B at expiration or B – A + net credit of position (if long option premium is less than premium collected from the sale of two or more options).

Loss characteristics: Loss limited on downside (to net cost of position in call-vs.-call, or no loss if position established at a credit) but open-ended if market rises. Rate of loss, if market rises beyond strike price B, is proportional to number of excess shorts in position.

Decay characteristics: Depends on the net time value purchased or sold via this strategy. If more time value sold than bought, then time value decays works to the benefit of the holder of this strategy.

CATEGORY:Precision
Long call A, short calls B
For example long 1 call @ A; short 2 calls @ B

Example

Ratio Call Spread Example

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 Option 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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Additional Futures & Options Strategies

  • How to Use This Guide
  • Long Futures
  • Long Synthetic Futures
  • Short Synthetic Futures
  • Long Risk Reversal
  • Short Risk Reversal
  • Long Call
  • Short Call
  • Long Put
  • Short Put
  • Bull Spread
  • Bear Spread
  • Long Butterfly
  • Short Butterfly
  • Long Iron Butterfly
  • Short Iron Butterfly
  • Long Straddle
  • Short Straddle
  • Long Strangle
  • Short Strangle
  • Ratio Put Spread
  • Ratio Call Backspread
  • Ratio Put Backspread
  • Box or Conversion

Contents Courtesy of CME Group.

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Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE "RISK DISCLOSURE" WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICE.

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