Call Ratio Backspread

AAA

DEFINITION of 'Call Ratio Backspread'

A very bullish investment strategy that combines options to create a spread with limited loss potential and mixed profit potential. It is generally created by selling one call option and then using the collected premium to purchase a greater number of call options at a higher strike price. This strategy has potentially unlimited upside profit because the trader is holding more long call options than short ones.

INVESTOPEDIA EXPLAINS 'Call Ratio Backspread'

An investor using this strategy would sell fewer calls at a low strike price and buy more calls at a high strike price. The most common ratios used in this strategy are one short call combined with two long calls, or two short calls combined with three long calls. If this strategy is established at a credit, the trader stands to make a small gain if the price of the underlying decreases dramatically.

RELATED TERMS
  1. Call

    1. The period of time between the opening and closing of some ...
  2. Put Ratio Backspread

    An option trading strategy that combines short puts and long ...
  3. Short (or Short Position)

    1. The sale of a borrowed security, commodity or currency with ...
  4. Option

    A financial derivative that represents a contract sold by one ...
  5. Long (or Long Position)

    1. The buying of a security such as a stock, commodity or currency, ...
  6. Underlying

    1. In derivatives, the security that must be delivered when a ...
Related Articles
  1. Options & Futures

    Backspreads: Good News For Breakout Traders

    This bullish trading strategy offers unlimited potential profit with limited risk.
  2. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  3. Options & Futures

    The Basics Of The Long Ratio Backspread

    This option trading strategy allows for unlimited profit potential in a given direction while still providing security.
  4. Options & Futures

    What is the difference between arbitrage and hedging?

    Dive into two very important financial concepts: arbitrage and hedging. See how each of these strategies can play a role for savvy investors.
  5. Options & Futures

    A Detailed Look Into China's Options Market

    As the Chinese options market gradually takes shape, we provide an overview, including details of the initial phase and building blocks, primary beneficiaries, the impact on the overall financial ...
  6. Options & Futures

    How do you trade put options on E*TRADE?

    Learn all about put option trading at E*TRADE. Explore margin accounts and become familiar with the different types of option writing.
  7. Trading Systems & Software

    How do you trade put options on Ameritrade?

    Learn about option trading with TD Ameritrade. Explore the different types of options and their possible impacts on the investors that write them.
  8. Options & Futures

    Avoid These 10 Mistakes When Trading in Cheap Options

    Cheap options can be very risky. Reduce your risk by avoiding these 10 common mistakes in trading in cheap options.
  9. Options & Futures

    What is the difference between a short position and a short sale?

    Learn how short selling and short positioning are different, specifically in regards to the nature of the commodity being bought and sold.
  10. Options & Futures

    Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct option brokers.

You May Also Like

Hot Definitions
  1. Multiplier Effect

    The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends ...
  2. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  3. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  4. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  5. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  6. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
Trading Center