Slightly bullish, you want the stock to rise to Leg 2 and then stop.
Alias
Front Spreads with Calls, Ratio Vertical Spread
Description
This strategy is used when the trader expects the underlying security to experience a limited price movement and wants to profit from the difference in the premiums received for the short call options and the premiums paid for the long call options.
This strategy allows you to purchase a call that is at the money or slightly out-of-the-money without paying full price. The goal is to obtain the call with Leg 1 for a credit or a very small debt by selling the two calls with Leg 2.
The stock rises too much, the risk is infinite and the strategy is neutral to slightly optimistic. Although you don’t want to remain exposed for too long, time is beneficial to this strategy. Ensure to have a stop-loss plan in place.
Breakeven
Leg 1 plus the net debit paid to enter the option
Leg 2 plus the maximum profit potential
Sweet Spot
stock price to be exactly at Leg 2 at expiration
Max Profit
Limited to the difference between Leg 1 and Leg 2 minus the net debit paid.
Max Loss
Limited Risk to the debit paid for the spread if the stock price goes down
Unlimited Risk if the stock price goes way up.
