Call Backspread Option Strategy
What are the Characteristics of this Option Strategy?
Call backspreads, also known as call ratio backspreads, sell one call at a lower strike and buy a larger number of calls at a higher strike in the same expiration. Bullish investors use them when they expect a considerable increase in the underlying security or stock, because the extra long calls leave the upside open while the worst case stays capped at the distance between the strikes less any credit received.
Is this a Bullish, Bearish or Neutral Strategy?
The Call Backspread Option Strategy is a bullish strategy
Is this a Beginner or an Advanced Option Strategy?
The Call Backspread Option Strategy is an advanced options strategy, primarily because managing the trade requires knowledge of technical analysis and the ability to adjust the position when the stock moves against you.
In what Situation will I use this Strategy?
Bullish investors employ the call ratio backspread strategy when they anticipate a notable surge in the underlying security or stock. The strategy involves buying a larger quantity of call options at a higher strike and selling a smaller quantity of calls at a lower strike, with the same expiration date.
Where does this Strategy Typically fall in the Range of Risk-Reward and Probability of Profit?
The Call Backspread Option Strategy has a defined maximum loss, taken if the stock closes right at the long strike, and an uncapped gain above the upper breakeven. The trade-off is that the most ordinary outcome, a stock that drifts up to the long strike and stops, is also the worst one, so the probability of profit is low even though the payoff can be large.
Where does this Strategy Typically Fall in the Range of Commissions and Fees?
The Call Backspread Option Strategy falls in the low to moderate range of commissions and fees. Most brokers charge per contract, and this strategy trades an uneven number of contracts on each leg, so the cost scales with the ratio you use.
Is this a Good Option Income Strategy?
The Call Backspread Option Strategy is not an income strategy. It is net long options, so it needs a real move up to pay. A stock that stalls near the long strike produces the maximum loss even when the position was opened for a credit.
How do I Know When to Exit this Strategy?
When trading the Call Backspread Option Strategy, it is important to know when to exit the trade. The optimal time to exit is when the stock price approaches resistance and fails to further move up.
How will Market Makers Respond to this Trade Being Opened?
Market makers typically respond to the opening of a Call Backspread Option Strategy by adjusting the bid and ask prices of the option contracts in order to ensure a profit. In addition, they may adjust their volatility expectations in order to protect their profits.
What is an Example (with Calculations) of this Strategy?
As an example, consider the following scenario:
For example, let’s say the current price of MSFT is $276.20. The investor believes that MSFT will move sharply higher before the contracts expire. The investor buys 2 ATM MSFT call contracts at the $275 strike and sells one ITM MSFT call at the $260 strike in the same expiration, for a net credit of $460.74. Below $260 every call expires worthless and the investor keeps that credit. The worst case is MSFT closing exactly at $275, where the short $260 call is $1,500 in the money and both long calls expire worthless, for a maximum loss of $1,039.26. The position loses money between the breakevens of $264.61 and $285.39. Above $285.39 the one extra long call means the profit keeps growing as MSFT rises, with no cap on the upside.
How Can MarketXLS Help it?
MarketXLS helps you identify potential Call Backspread Option Strategies easily, quickly and accurately with its Married Puts Tool. It also allows you to compare the reward and the defined loss of competing spreads side by side. The MarketXLS tools also make it easy to track your options trades, view the Greeks of your options, and calculate your break-even points and maximum profit and loss levels. Finally, MarketXLS also makes it easy to adjust your option trades if the market moves against you.
Here are some templates that you can use to create your own models
Call Backspread Option Strategy
Call Ratio Back-Spread
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
What is the Risk Associated with Leap Options Investing?
The Benefits of Using Call Credit Spreads for Trading
Option Strategies For Professional Traders
ITM Options: A Strategic Investing Tool
Calls And Call Ratio Backspread (Explained With Real Time Data)