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Call Ratio Spread |
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Note: Ratio spreads are utilized if the investor doesn't want the market to move much either way once they make their trade. In that respect, it is considered a neutral strategy. While call and put ratio spreads can be useful strategies when an investor is expecting fairly stable prices over the short term, they are not without risk, since a ratio spread involves more short than long options. If the trade moves against the investor, the extra short option(s) expose him or her to unlimited risk.
This trade involves selling a call (usually at-the-money or near-to-the-money) at a lower strike and buying a greater number of calls at a higher strike price. Depending on the strikes chosen, the position could also be established at break-even or at a small premium cost. Investors can use other ratios 2 by 3, for example; selling 2 calls and buying 3 calls. It is also good to try and put on as near to zero price as possible, in order to get good downside protection.
This strategy is best for bullish investors who expect significant moves in an already volatile market, as it offers great limited risk with unlimited reward. Investors will want to see volatility levels keep at least stable, but rise if possible, when using this strategy, as the profit is unlimited should the underlying rallies. The maximum loss occurs at higher strike which is the difference between strikes minus (plus) net credit (debit). The lower break-even point occurs when the underlying exceeds the lower strike option by the same amount as the net credit received; if the initial position was established at a net cost, there is no lower break-even point. The higher break-even point is reached when the intrinsic value of the lower strike is equal to the intrinsic value of the two higher strike options plus (minus) the net credit (debit).
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| Symbol |
Rate |
| GBP:CHF |
1.747703 |
| GBP:JPY |
155.484239 |
| GBP:USD |
1.638403 |
| NZD:USD |
0.627050 |
| EUR:CAD |
1.545998 |
| EUR:CHF |
1.516857 |
| EUR:GBP |
0.867915 |
| EUR:JPY |
134.947096 |
| EUR:USD |
1.421994 |
| AUD:JPY |
76.394373 |
| AUD:USD |
0.805000 |
| USD:CAD |
1.087204 |
| USD:CHF |
1.066711 |
| USD:JPY |
94.899879 |
| USD:SEK |
7.613010 |
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Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
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© ForexCenter.com, 2005, All Rights Reserved
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History