Call Back Spread
A callback spread is a trading strategy involving buying a call option at a lower strike price and selling a call option at a higher strike price. The options have the same expiration date and underlying asset. This strategy is used when an investor is bullish on the underlying asset but expects limited upside potential. The investor can profit if the underlying asset price rises, but the potential loss is limited if the asset price falls. Overall, the call-back spread has limited risk and limited reward.
The potential profit is limited, but so is the potential loss, making it a limited risk, limited reward strategy. The investor can earn a profit if the price of the underlying asset rises, while the maximum loss is limited to the premium paid for the options.
How to use Call Back Spread
To use a callback spread, an investor typically follows these steps:
1. Identify an underlying asset that is expected to have a moderate increase in price.
2. Determine the strike prices and expiration dates for the call options. The investor should buy a call option at a lower strike price and sell a call option at a higher strike price with the same expiration date.
3. Calculate the maximum potential profit and loss. The maximum profit is the difference between the strike prices minus the net premium paid, while the maximum loss is the net premium paid.
4. Monitor the price of the underlying asset. If the price increases, the investor can profit from the trade. If the price decreases, the investor's potential loss is limited to the premium paid.
A call-back spread is a strategy that is used when an investor expects a moderate increase in the price of the underlying asset and wants to limit both potential profit and potential loss. It is important to understand the risks and rewards of this strategy before using it, as with any investment strategy.
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