Chapter 06 · Section 6.1
Butterfly Call Spreads
The call ratio backspread is similar in contruction to the short butterfly call spread you looked at in the previous section. The only difference is that you omit one of the components (or legs) used to build the short butterfly when constructing a call ratio backspread.
Looking at the graph, which of the legs do you omit from the short butterfly to construct a call ratio backspread?
a) short call, low exercise
b) long calls, medium exercise
c) short call, high exercise
The call ratio is not leveled off on the right like the butterfly. Only one of the above positions could reduce the upside profit.
Each of the turning points in the net profit loss graph correspond to an exercise price of one of the underlying options position "legs."