CALL RATIO SPREAD 1×2

A traditional Call Ratio spread is very easy to define, but not quite as easy to understand.

In simple terms, it is just a basic Call Spread with selling an extra Call to help finance the Call Spread. AND BELOW IS OUR PROFIT AND LOSS GRAPH;

For example: the 100/125 Call 1×2 is Buy the 100 Call once to sell the 125 Call two times. Ideally this trade is put on for a small credit. The Max profit is same as that of a Call spread, the Strike differential less the premium paid (or collected) for the structure. The loss side is much more difficult to explain because you essentially have two separate trades on. You own a Call Spread and you are short a Call. If you think about the Max loss potential on both trades they are as follows: The long Call spread max loss is only the premium you paid for the structure, but the max loss for being short a Call is unlimited. Therefore, in theory, your possible max loss on a 1×2 Call Spread is also unlimited. In order to win on a Call Ratio 1×2, the market needs to grind higher at a slow pace towards your short Strike. If it moves higher too fast, you will feel market to market pain as your 2 short Calls will gain in price more quickly than your 1 long Call. Ratio Spreads are not meant for inexperienced traders as the risk is too great.

Throughout the learning section I will advise you to manually do an expiration Profit & Loss table. This allows you to visualize exactly what it is that you are doing and is something all beginner traders do to start learning about strategies.

YOU then just need to work out each individual leg profit and loss then net it out in a graph