Chapter 06 · Section 6.1
Ratio Call Spread
You know that ratio spreads get their name from the fact that you buy/sell the options in ratios of 1:2 or 1:3.
What is the ratio used in the spread shown on your left?
a) Long one low exercise, Short two high exercise.
b) Long two low exercise, Short one high exercise.
First impressions can be deceiving. To get the answer from this graph, first consider that the right to buy at the lower exercise price will be more expensive that the right to buy at the higher exercise price.
Another point is that the profit/loss profile of this position has unlimited loss on the upside. This means that the bearish positions must outweigh the bullish.
Short calls are bearish.
First impressions can be deceiving. To get the answer from graph, first consider that the right to buy at the lower exercise price will be more expensive that the right to buy at the higher exercise price.