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Ratio Call Spread
Long Ratio Call Spread
A Long Ratio Call Spread is a combination of purchasing a lower strike Call and sale of two higher strike Calls, with the same expiration. This can be done with any ratio of long vs short Calls.
Payoff Diagram:
Direction Assumption: Neutral-Bullish
Ideally you want the underlying to rise all the way to the short strike price, but not go past the short strike.
Maximum Profit: Limited to the net credit received.
Maximum profit is realized when the underlying moves to Short Call strike price on expiration.
Maximum Loss: Unlimited
Breakeven Price:
• If net credit received: Equal to the Short Call strike price + maximum profit potential.
• If net debit paid:
1) On the lower end, Equal to Long Call Strike Price + net debit paid.
2) On the higher end, equal to the Short Call Strike Price + maximum profit potential.
Theta: Passage of Time -> Positive Effect
The net effect of time decay is positive. It will erode the value of the two Short Calls in a bigger extent than the Long Call.
Volatility:
If Volatility increases -> Negative Effect.
If Volatility decreases -> Positive Effect.
