Call Ratio Backspread

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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. Spread

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  3. Short (or Short Position)

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    1. The buying of a security such as a stock, commodity or currency, ...
  5. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  6. Underlying

    1. In derivatives, the security that must be delivered when a ...
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