Call Ratio Back Spread Calculator

A call ratio back spread is a strategy that involves selling one or more call options at a lower strike price and buying a greater number of call options at a higher strike price.

This strategy is also known as a reverse call ratio spread, and it is a bullish strategy that has limited risk and unlimited profit potential. The strategy involves buying more call options at the higher strike price than are sold at the lower strike price.

A call ratio back spread is a popular option trading strategy that allows traders to profit from a bullish move in the underlying asset with limited risk and unlimited profit potential.

What is a Call Ratio Back Spread?

A call ratio back spread is a bullish options trading strategy that involves selling one or more call options at a lower strike price and buying a greater number of call options at a higher strike price. This creates a net credit, which is the profit the trader earns upfront.The strategy is designed to maximize profit potential while minimizing the risk of loss. It is often used by traders who have a bullish outlook on a particular asset and want to profit from it.

How Does a Call Ratio Back Spread Work?

The trader earns a net credit from the trade, which is the premium they receive from the short call options minus the premium they pay for the long call options.

If the price of the underlying asset rises, the trader will be able to exercise their long call options at the higher strike price, while the short call options at the lower strike price will expire worthless. This means the trader will make a profit on the trade.

if the price of the underlying asset falls, the trader will be exposed to the risk of losing money on the short call options. To minimize this risk, some traders will use stop-loss orders to limit their losses.

The trader can also adjust the strike prices and the number of contracts to better manage risk.

Advantages of a Call Ratio Back Spread

1. One of the main advantages is that it allows traders to profit from a bullish move in the underlying asset with limited risk and unlimited profit potential.
2. It is a relatively simple strategy to implement and can be adjusted to suit the trader's risk tolerance.
3. It can be used in a variety of market conditions.
4. It can be used in a volatile market or a market that is trending upwards.

Disadvantages of a Call Ratio Back Spread

It can be risky if the price of the underlying asset does not rise as expected.

The trader will be exposed to the risk of losing money on the short call options.

The formula for a call ratio back spread is

Max Profit = Unlimited
Max Loss = [(Total premium received) - (Difference in strike prices x Number of long calls)] - (Transaction costs)
Breakeven Point = Higher strike price + (Total premium received / Number of long calls)

1. The max profit for a call ratio back spread is unlimited as the trader can potentially earn a significant profit if the underlying asset's price rises sharply.
2. The max loss is limited and occurs when the underlying asset's price falls sharply.
3. The trader is unable to exercise their long call options.
4. The max loss is calculated as the difference between the total premium received and the difference in strike prices multiplied by the number of long calls, minus transaction costs.
5. The breakeven point is the point at which the trader neither makes a profit nor a loss.
6. At the breakeven point, the trader will only recover the premium paid for the options, and any move beyond this point will result in a profit or a loss.