Explanation
Ratio call write is a neutral options trading strategy. This options strategy is constructed with ownership of the underlying security or going long on future contract and simultaneously selling more call options than underlying asset owned. On implementing this strategy and taking base assumption of little/no volatility, the trader capitalizes on the limited profit that is in the form of premium received.
Risk:
If the trader base assumption is voided and underlying makes a volatile move to the upside. In such case potential losses could be limitless and there is a greater number of uncovered calls shorted.
Reward:
Max profit for a ratio call write is made when the underlying stock price at expiration is at the strike price of the options sold. At thatpoint both short calls will expire worthless and the value of the long stock position remains unchanged.
Construction
Buy 1 NIFTY in Futures Market
Sell2NIFTYATMCall Options
Option Type | Expiry Date | Strike Price | LTP | Action | No. Of Lots |
CALL | 27/04/2023 | 42800.0 | 145.1 | Sell | 2 |
FUTURES | 27/04/2023 | -NA- | 42750.9 | Buy | 1 |
Market Expiry | Payoff 1 | Payoff 2 | Net Premium | Option PayOff At Expiry |
42000.0 | 0.0 | -750.9 | 290.2 | -460.7 |
42100.0 | 0.0 | -650.9 | 290.2 | -360.7 |
42200.0 | 0.0 | -550.9 | 290.2 | -260.7 |
42300.0 | 0.0 | -450.9 | 290.2 | -160.7 |
42400.0 | 0.0 | -350.9 | 290.2 | -60.7 |
42500.0 | 0.0 | -250.9 | 290.2 | 39.3 |
42600.0 | 0.0 | -150.9 | 290.2 | 139.3 |
42700.0 | 0.0 | -50.9 | 290.2 | 239.3 |
42800.0 | 0.0 | 49.1 | 290.2 | 339.3 |
42900.0 | -200.0 | 149.1 | 290.2 | 239.3 |
43000.0 | -400.0 | 249.1 | 290.2 | 139.3 |
43100.0 | -600.0 | 349.1 | 290.2 | 39.3 |
43200.0 | -800.0 | 449.1 | 290.2 | -60.7 |
43300.0 | -1000.0 | 549.1 | 290.2 | -160.7 |
43400.0 | -1200.0 | 649.1 | 290.2 | -260.7 |
43500.0 | -1400.0 | 749.1 | 290.2 | -360.7 |
43600.0 | -1600.0 | 849.1 | 290.2 | -460.7 |
Payoff Chart
Example
Bank Nifty is trading near 42800 levels and trader sees little to no volatility. The trader implemented the Ratio call write options strategy by buying near month futures contract and shorting ATM call option at premium of Rs. 145. Net funds inflow initially amounts to Rs. 290 (145*2).
Scenario 1:
If at the time of expiry market fell at 42300 levels instead of trading range bound. The trader will make losses on the long future position but will keep whole premium received from selling call options.
Scenario 2:
If the market traded as per the expectation of the trader and remained range bound. The trader will make gain/loss on future position and will keep the whole premium.
Scenario 3:
In case the market traded against the expectation of the trader and moved higher beyond 43200. The long future position will result in gain but the short call option will start to make losses if the price move beyond breakeven point.
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