Options Trading Strategies: Bullish - Call Backspread Option Strategy
Call backspread or reverse call ratio spread strategies are used by traders who believe the asset will increase in price and volatility in the near future. Usually, a trader does not need to be direction specific here, indicating whether the market will move to the upside or downward, but is biased toward inclining toward advancing market. If the bias is correct, the profits will be much greater and trader tends to retain the premium as revenue. This strategy is implemented by selling a number of call options (ITM) and purchasing a greater number of call options. (OTM). The dealer will determine the ratio of purchasing and selling options. It is an options trading technique with unlimited reward and limited risk that is used when the options trader believes the underlying stock will experience substantial upside movement in the short run.
Risk:
The maximum loss is restricted, but it will occur if the asset price at expiration concludes at the long OTM call.
Reward:
The potential reward in this approach is potentially limitless. On the positive, the underlying security price can go indefinitely high.
Construction
Sell 1 ITM Call Option
Buy 2 OTM Call Options
| Option Type | Expiry Date | Strike Price | LTP | Action | No. Of Lots |
| CALL | 29/03/2023 | 39400.0 | 676.65 | Buy | 2 |
| CALL | 29/03/2023 | 38800.0 | 1092.45 | Sell | 1 |
Payoff Chart
| Market Expiry | Payoff 1 | Payoff 2 | Net Premium | Option PayOffAt Expiry |
| 38600.0 | 0.0 | 0.0 | -260.85 | -260.85 |
| 38700.0 | 0.0 | 0.0 | -260.85 | -260.85 |
| 38800.0 | 0.0 | 0.0 | -260.85 | -260.85 |
| 38900.0 | 0.0 | -100.0 | -260.85 | -360.85 |
| 39000.0 | 0.0 | -200.0 | -260.85 | -460.85 |
| 39100.0 | 0.0 | -300.0 | -260.85 | -560.85 |
| 39200.0 | 0.0 | -400.0 | -260.85 | -660.85 |
| 39300.0 | 0.0 | -500.0 | -260.85 | -760.85 |
| 39400.0 | 0.0 | -600.0 | -260.85 | -860.85 |
| 39500.0 | 200.0 | -700.0 | -260.85 | -760.85 |
| 39600.0 | 400.0 | -800.0 | -260.85 | -660.85 |
| 39700.0 | 600.0 | -900.0 | -260.85 | -560.85 |
| 39800.0 | 800.0 | -1000.0 | -260.85 | -460.85 |
| 39900.0 | 1000.0 | -1100.0 | -260.85 | -360.85 |
| 40000.0 | 1200.0 | -1200.0 | -260.85 | -260.85 |
| 40100.0 | 1400.0 | -1300.0 | -260.85 | -160.85 |
| 40200.0 | 1600.0 | -1400.0 | -260.85 | -60.85 |
Call Backspread Option Trading Example
Assume the Bank Nifty is trading near 39500 levels, and the investor/trader is optimistic on the market and volatility. He'll employ the Call Back Spread Strategy. He will short one 38800 Bank Nifty in-the-money (ITM) Call Option for Rs. 1092 and purchase two 39400 Bank Nifty out-of-the-money (OTM) Call Options for Rs. 676 each. The contract will be implemented for a debit amount equal to Rs. 10400 (676) - (1092) *40.
Scenario 1:
At expiry if Bank Nifty closes at 40200, then the trader will make a profit of Rs. 8000. {((40200-39400)*2) + (40200-38800)}*40]
Scenario 2:
At expiry if Bank Nifty closes at 38300, the trader will onto his net premium paid while entering into the contract, the loss amounts to Rs. 10400 {(676*2) - (1092)} *40.
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Also read: Married Put Option Strategy
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