RATIO SPREAD
BUY ONE ITM
CALL
SELL TWO OTM
CALL
The ratio spread
is a neutral strategy. It is a limited profit, unlimited risk options trading
strategy that is taken when the options trader thinks that the underlying stock
will experience little volatility in the near term.
Market Scenario: Neutral
Risk: Unlimited
Reward: Limited
BEP:
Maximum Profit = Strike Price of Short Call - Strike Price of
Long Call + Net Premium Received
Upper
BEP = Strike Price of Short Calls + (Points of Maximum Profit / Number of
Uncovered Calls)
Entry:
|
SPOT
|
5000
|
|
|
STRIKE
|
PREMIUM
|
|
BUY 1 ITM CALL
|
4900
|
221
|
|
SELL 2 OTM CALL
|
5100
|
124
|
BEP Calculation:
Max. Profit = 5100 – 4900 + 27 = 227 BEP = 5100 + (227/1) = 5327
On Exit if:
|
SPOT
|
BUY 1 ITM
|
SELL 2 OTM
|
STRATEGY PAY-OFF
|
|
4700
|
-221
|
248
|
27
|
|
4800
|
-221
|
248
|
27
|
|
4900
|
-221
|
248
|
27
|
|
5000
|
-121
|
248
|
127
|
|
5100
|
-21
|
248
|
227
|
|
5200
|
79
|
48
|
127
|
|
5300
|
179
|
-152
|
27
|
|
5327
|
206
|
-206
|
0
|
|
5400
|
279
|
-352
|
-73
|
|
5500
|
379
|
-552
|
-173
|
Ratio Spread - Strategy Pay-Off
Above diagram shows that the
maximum profit we can get from this ratio spread is 227. At the same time the
maximum loss possible is unlimited.
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