Call Ratio Backspread Profit & Loss Graph
Call Ratio Backspread
The following is the profit/loss graph at expiration for the Bull Call Ratio Backspread in the example given on the previous page.
The breakeven point for the bull call ratio backspread is given next:
- Breakeven Stock Price1 = Sold Call Option Strike Price + Net Premium Sold (Cost of Options Sold - Cost of Options Purchased). Note: This breakeven might not exist with every bull call ratio backspread a trader trades (i.e. if there is net premium purchased rather than sold).
- Breakeven Stock Price2 = Sold Call Option Strike Price + 2 x Distance between strike prices of the call sold and the calls purchased - Net Premium Sold or + Net Premium Purchased.
To illustrate, the trader sold the $50.00 strike price call option for $1.53, and also bought two options at the $52.50 strike price for $0.60 each, for a net premium sold of $0.33 ($1.53 - $1.20). The strike price sold was the $50.00. Therefore, $50.00 + $0.33 = $50.33. The trader will breakeven, excluding commissions/slippage, if the stock is below $50.33 by expiration.
For the second breakeven, the distance between the two strike prices is $2.50 ($52.50 - $50.00). Consequently, 2 times $2.50 is $5.00. The net premium sold was $0.33. The sold call option strike price is $50.00. Summing everything together, $50.00 + $5.00 - $0.33 = $54.67. As such, the two breakeven points are $50.33 and $54.67.
The profit for a bull call ratio backspread is as follows:
- Bull Call Ratio Backspread Profit = Stock price at expiration - Breakeven price
To continue the example, if the stock price at expiration is $56.00, then the profit would be $133 [($56.00 - $54.67) x 100 shares/contract].
To the downside, the max profit is $33 anywhere below the strike price of the option sold. This profit area to the downside might not exist for all bull call ratio backspreads.
A partial loss occurs between the call strike price sold and the call strike price purchased. A partial loss also occurs between the point of max loss and the upper breakeven. The calculation is given next:
- Bull Call Ratio Backspread Partial Loss1 = (Stock Price at Expiration - Strike Price of Option Sold) - Net Premium Sold or + Net Premium Purchased
For example, if the stock price was $52.00 at expiration and the strike price of the option sold is $50.00 and net premium sold was $0.33, then [($52.00 - $50.00) - $0.33] x 100 shares/contract = $167 loss.
- Bull Call Ratio Backspread Partial Loss2 = (Upside Breakeven Stock Price - Stock Price at Expiration)
To illustrate, if the stock price at expiration was $54.00 and the upside breakeven stock price was $54.67, then [($54.67 - $54.00) x 100 shares/contract] = $67.
As stated previously, the max loss occurs at the strike price of the calls purchased. The formula is as follows:
- Bull Call Ratio Backspread Max Loss = (Strike price of calls purchased - Strike price of call sold) + Net Premium Purchased or - Net Premium Sold.
As an example, the strike price of the calls purchased is $52.50, the strike price of the call sold is $50.00, and the net premium sold is $0.33: ($52.50 - $50.00) - $0.33 = $2.17 x 100 shares/contract = $217.