Options Strategy:Bull Ratio Spread

By | January 23, 2013

The Bull Ratio Spread could be called as a variation of the Bull Call Spread. Here we expect the stock/commodity/forex  to move sideways  to slightly higher.
The Position is created by purchasing a call (preferably At-the-money or slightly Out-of-the-money) and selling more than one calls at a higher strike price in a ratio of 1:2 or 1:3 (preferably near to the target price) with the same expiration (same month).

The strategy is preferred when the upside seems to be decisively capped.

A short time till expiration is generally preferred for the strategy to take advantage of the time decay in the short options and not give the stock enough time to move very high in price and produce a loss.

  • Maximum Risk: Unlimited on the upside, Limited on the downside to the initial debit paid or none if the position is opened for a credit.
  • Maximum Profit: (Short call Strike – Long call strike) +/- Net Premium paid or received.
  • Break-even Price:Here there would be two break-even points

(a) Upper break-even point: Strike price of Short calls + Difference in strike prices +/- Net premium paid or received.

(b) Lower Break-even Point: Strike price of long call +/ Net premium paid or Received.

Let us consider an illustration:

We are moderately bullish on the Nifty which trades at 6020 and are anticipating not more than a 150-200 points move.

We Buy 1 Feb 6000 Call at Rs.142 and Sell 2 Feb 6200 Calls at Rs. 47 each.
The Maximum Risk :

  • Unlimited on the upside
  • Downside it is none :since the position was opened for a debit i.e. (2*47) – 142 = -58.

The Maximum Profit involved is Difference in strikes +/- Net premium paid or received.i.e. Rs.142 = (6200-6000) – 58.
Calculation for  Breakeven Points:
(a) Lower breakeven Point (when the strategy starts making profit) Long call strike +/- Net premium paid or received ie. 6058 (6000+58).
(b) Upper Breakeven Point (when the strategy starts making a loss) Short Call Strike + Difference in Strikes +/- Net premium paid or received ie.6342 (6200+200-58).

Risk/Reward Profile:

 

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