Call Ratio Back Spread strategy in options trading - Stock market technical analysis

Описание: Call ratio back spread is a Bullish strategy means the outlook for the underlying asset (Nifty) should be extremely bullish to make maximum profit in this strategy unlike Call ratio spread where the market needs to trade with in a specified range to make maximum profit

Here in this example of Nifty the Investor constructs the call ratio back spread strategy with these contracts

1. Sells 1 ITM (In The Money) Call option and receives the premium (Leg - 1)
2. Buys 2 OTM (Out Of the Money) Call option and pays the Premium (Leg-2)

here the premium he receives from selling ITM Call funds the OTM Calls he buys which results in a Net credit to his account

Case :1
If Nifty is extremely bullish and trades above the Break even of Leg-1

he incurs a profit from Leg-2 (2 calls bought) since here his bet is nifty will trade above a strike value ,

but he incurs a loss form Leg-1 which is offset by the overwhelming profit from Leg-2 or we could say in this instance he makes a Maximum profit from this strategy

Case:2
If Nifty is bearish or trades below the spot value

he incurs a loss form Leg-2 which is offset with some gain from Leg-1
which can act as a hedge to minimize his loss here

Case:3
If Nifty is neutral or side ways

he still incurs a loss from Leg-2 again this is offset form gain from Leg-1 which acts as a hedge to minimize his loss here

Call ratio back spread is a Bullish strategy implemented by investors when they expect the underlying to make a huge upward movement and yet mitigating the risk with a hedge in case of downward or sideways movement in the market


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