232 Part II: Call Option Strategies 
Figure 13-1 • 
Calendar spread sale at near-term expiration. 
$400 
$300 
Implied Volatility 
Lower 
$200 \ 
f/) 
$100 f/) 
0 
~ 
$0 50 60 110 120 
a. -$100 
-$200 
-$300 
Implied Volatility 
-$400 Remains High 
-$500 
Underlying Price 
allowed to stand because none of the member firms cared about changing it. Still, if 
one has excess collateral - perhaps from a large stock portfolio - and is interested in 
generating excess income in a hedged manner, then the strategy might be applicable 
for him as well. Futures option traders receive more favorable margin requirements, 
and it thus might be a more economical strategy for them. 
REVERSE RATIO SPREAD (BACKSPREAD) 
A more popular reverse strategy is the reverse ratio call spread, which is comrrwnly 
known as a backspread. In this type of spread, one would sell a call at one striking 
price and then would buy several calls at a higher striking price. This is exactly the 
opposite of the ratio spread described in Chapter 11. Some traders refer to any 
spread with unlimited profit potential on at least one side as a backspread. Thus, in 
most backspreading strategies, the spreader wants the stock to rrwve dramatically. He 
does not generally care whether it moves up or down. Recall that in the reverse 
hedge strategy (similar to a straddle buy) described in Chapter 4, the strategist had 
the potential for large profits if the stock moved either up or down by a great deal. 
In the backspread strategy discussed here, large potential profits exist if the stock 
moves up dramatically, but there is limited profit potential to the downside. 
Example: XYZ is selling for 43 and the July 40 call is at 4, with the July 45 call at l. 
A reverse ratio spread would be established as follows: ·