Bullish Call Ratio Backspread
Bullish Call Ratio Backspread – Sell lower strike Calls and buy a greater number of higher strike Calls (1 to 2 or 2 to 3) in a market with a reverse volatility skew where you anticipate a sharp price rise with increasing volatility. Look for even or net credit trades where possible on options with greater than 90 days until expiration.
Entry Rules
Strong long term Bullish expectations (possible breakout) for the underlying asset.
Low Implied Volatility resulting in cheap options.
Enter at break even or a credit.
Exit Rules
- Close position with 30 days to expiration if stock price is between breakeven price points.
- Let options expire worthless if stock price is below lower breakeven price.
- Exit position if stock reaches your target price.
- If position is profitable, but the stock price doesn’t look like it will go any higher, exit the entire position, or consider selling one profitable Call, and hold on to the position as a Bear Call Spread.
Profit & Loss Calculations
Maximum Risk - Limited to # short Calls X strike price difference - net credit or + net debit
Maximum Profit - Unlimited on the upside beyond the breakeven, limited on the downside to the net credit if any
Upside Breakeven = Higher Call strike price +[(strike price difference X # short Calls)/(# long Calls -# short Calls)] – net credit or + net debit
Downside Breakeven = Lower Call strike price + net credit or – net debit
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