Options Trading Strategies: Call Backspread
A call backspread (otherwise called a call ratio volatility spread and call ratio backspread) is a three-legged strategy, created by selling one In The Money (or At The Money) call and buying two Out of The Money calls. All calls are with the same expiration date.
A call ratio backspread can also be created by selling two calls and buying three calls as it preserves the ratio between legs, which must be 1:2 or 2:3 etc.
You can look at a call backspread as a combination of a bear call spread and one long call.
When to use this strategy?
You are extremely bullish and looking for a low risk, low-cost trade, and the volatility of the BTC/ETH is really high.
Below is a Profit and Loss chart example of a call backspread options strategy:
Pros:
Capped risk, especially if the BTC/ETH drops drastically. Uncapped and high reward if the BTC/ETH price rises drastically.
Cons:
Relatively complicated trade for beginners. High loss if the underlying price stagnates.
Example:
In this example, BTC is trading at 43,594.45 USD and you expect its price to dramatically move. You have soldan ITM call with a strike price of 43,000.00 USD and bought two OTM calls both with a strike price of 44,000.00 USD, all with an expiration date of February 12th 2022.
As this is a net credit spread, and the long calls cost you less than a premium from the short call you have received a net premium of 265.61 USD.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is at or below the ITM short call strike price, then all options expire worthless, and you keep your net premium received.
If the BTC price is above the ITM short call strike and below the OTM long call strike, then the short call is assigned and the long calls expire, you are in the profit as long as the bitcoin price ends up below the first break-even point.
If the BTC price is equal to the OTM long call, you are at your maximum loss which is equal to the difference between strikes minus the net premium.
If the BTC price is above the OTM long call strike price, then the short call is assigned and both long calls are exercised, you are in the profit as long as the bitcoin price ends up above the second break-even point.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 43,000.00 (strike price SC ITM) | +265.61 (net premium) |
| 43,166.00 | +99.61 |
| 43,265.61 (break even 1) | 0 |
| 43,659.00 | -393.39 |
| 44,000.00 (2 x LC OTM) | -734.39 (max loss) |
| 44,395.00 | -339.39 |
| 44,734.39 (break even 2) | 0 |
| 45,186.00 | +451.61 |
| 46,132.00 | +1,397.61 |