If the trader is bearish on market and bullish in volatility, he will implement this strategy. However the trader can be neutral in nature i.e. indifferent if the market moves in either of the direction, this strategy will make profits, but uptrend will give a capped income than downtrend which will give unlimited returns.
This strategy involves buying of an underlying asset in the cash/futures market and simultaneously selling ATM Calls double the number of long quantity. This strategy is used by a trader who is neutral on the market and bearish on the volatility in the near future. Here profits will be capped up to the premium amount and risk will be potentially unlimited.
Upper Breakeven Point = Strike Price of Short Calls + Points of Maximum Profit, Lower Breakeven Point = Strike Price of Short Calls - Points of Maximum Profit
PUT BACKSPREAD Vs RATIO CALL WRITE - When & How to use ?
PUT BACKSPREAD
RATIO CALL WRITE
Market View
Bearish
Neutral
When to use?
This strategy is used by a trader who is neutral on the market and bearish on the volatility in the near future.
Action
Sell 2 ATM Calls
Breakeven Point
Upper Breakeven Point = Strike Price of Short Calls + Points of Maximum Profit, Lower Breakeven Point = Strike Price of Short Calls - Points of Maximum Profit
PUT BACKSPREAD Vs RATIO CALL WRITE - Risk & Reward
PUT BACKSPREAD
RATIO CALL WRITE
Maximum Profit Scenario
Net Premium Received - Commissions Paid
Maximum Loss Scenario
Price of Underlying - Strike Price of Short Call - Net Premium Received OR Purchase Price of Underlying - Price of Underlying - Net Premium Received + Commissions Paid
Risk
Limited
Unlimited
Reward
Unlimited
Limited
PUT BACKSPREAD Vs RATIO CALL WRITE - Strategy Pros & Cons
PUT BACKSPREAD
RATIO CALL WRITE
Similar Strategies
Variable Ratio Write
Disadvantage
• Potential loss is higher than gain. • Limited profit.
