A very bullish approach results in large profits when the stock makes a significant upward move and losses when it moves just a little. Even if you’re set up for a net credit and the stock declines, you could still make a modest profit.
Description
Involves selling a number of call options at a lower strike price and simultaneously buying a greater number of call options at a higher strike price, with both sets of options having the same expiration date. The trader will typically sell more call options at the lower strike price than they buy at the higher strike price, creating a “backspread” with a negative delta.
The goal of a ratio call backspread is to profit from a significant increase in the price of the underlying asset. If the price of the underlying asset increases enough, the long call options at the higher strike price will increase in value faster than the short call options at the lower strike price, resulting in a profit for the trader. However, if the price of the underlying asset does not increase enough or decreases, the trader will incur a loss.
Sweetspot
Stock is very Bullish
Breakeven
the lower strike price of the short call options plus the premium received for those options, minus the higher strike price of the long call options and the premium paid for those options
Max Profit
Unlimited, as the price of the underlying asset could theoretically continue to increase without any upper bound
Max loss
is limited to the difference between the strike prices of the options, minus any premiums received for the short call options and any commissions or fees associated with the trade.
