25 lines
1.7 KiB
Plaintext
25 lines
1.7 KiB
Plaintext
Ratio Call Spreads
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A ratio call spread is a neutral strategy in which one buys a number of calls at a lower
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strike and sells more calls at a higher strike. It is somewhat similar to a ratio write in
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concept, although the spread has less downside risk and normally requires a smaller
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investment than does a ratio write. The ratio spread and ratio write are similar in that
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both involve uncovered calls, and both have profit ranges within which a profit can
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be made at expiration. Other comparisons are demonstrated throughout the chapter.
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Example: The following prices exist:
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XYZ common, 44;
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XYZ April 40 call, 5; and
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XYZ April 45 call, 3.
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A 2:1 ratio call spread could be established by buying one April 40 call and simulta
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neously selling two April 45's. This spread would be done for a credit of 1 point - the
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sale of the two April 45's bringing in 6 points and the purchase of the April 40 cost
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ing 5 points. This spread can be entered as one spread order, specifying the net cred
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it or debit for the position. In this case, the spread would be entered at a net credit
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of 1 point.
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Ratio spreads, unlike ratio writes, have a relatively small, limited downside risk.
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In fact, if the spread is established at an initial credit, there is no downside risk at all.
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In a ratio spread, the profit or loss at expiration is constant below the lower striking
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price, because both options would be worthless in that area. In the example above, if
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XYZ is below 40 at April expiration, all the options would expire worthless and the
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spreader would have made a profit of his initial I-point credit, less commissions. This
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I-point gain would occur anywhere below 40 at expiration; it is a constant.
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