The call backspread (reverse call ratio spread) is a bullish strategy in options trading that involves selling a number of call options and buying more call options of the same underlying stock and expiration date at a higher strike price. It is an unlimited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience significant upside movement in the near term....
Unlimited profit potential: The call back spread profits when the stock price makes a strong move to the upside beyond the upper breakeven point. There is no limit to the maximum possible profit.
Limited risk : Maximum loss for the call back spread is limited and is taken when the underlying stock price at expiration is at the strike price of the long calls purchased. At this price, both the long calls expire worthless while the short call expires in the money.
Break even points
- Upper Breakeven Point = Strike Price of Long Call + Points of Maximum Loss
- Lower Breakeven Point = Strike Price of Short Call