Ratio Call BackSpread Options Profit & Loss Calculations: Options, Futures, Derivatives & Commodity Trading

# Ratio Call BackSpread Options Profit & Loss Calculations

Continuing further from our previous post Ratio Call BackSpread Options Trading Explained: Example & Payoff Charts , lets see the details about Profit & Loss Calculations for Ratio Call BackSpread.

What are the breakeven points for the Ratio Call BackSpread Options Trading?
Break even points are the points or spots when there is no profit - no loss for the option trader. i.e. they are the points on either side of which there is a profit area and a loss area.
As can be seen from the payoff function, the Ratio Call BackSpread has 2 break even points, one on the upper side and one on the lower side - where the final BROWN colored graph crosses the horizontal axis (x-axis) at
Downward Breakeven Point for Ratio Call BackSpread Options = [Lower strike + net credit amount]
In the above case, it will be = \$40 + \$7 = \$47

Upward Breakeven Point for Ratio Call BackSpread Options = [Higher OTM strike price] + [difference between strikes * number of short contracts] / [number of long calls - number of short calls ] - [net credit received]

In the above case, it will be = \$60 + [(\$60-\$40)*2]/[2-1] - \$7 = \$60 + \$20 -\$7 = \$73
As seen from the final BROWN colored payoff function chart, they are indicated in the final payoff function as the brown color graph crosses the horizontal axis or x-axis.

The profit region of Ratio Call BackSpread is in 2 parts - on the upside and on the downside.
On the upside, the profit can go to unlimited as the stock price continues to rise further and further
On the downside, the profit will be limited and capped to the maximum net credit amount.

Maximum Profit of Ratio Call BackSpread Options = Net Options Premium Received - Brokerage & Commissions Paid (on the downside)
OR
Maximum Profit of Ratio Call BackSpread Options = Unlimited - Brokerage & Commissions Paid (on the upside)

The loss is limited and occurs in an inverted pyramid shape - i.e. it goes linearly as the underlying stock price moves (within the loss region between 2 break even points)
Maximum Loss of Call Ratio BackSpread Options = Difference in strike price - Net Options Premium Received - Brokerage & Commissions Paid

= \$20 - \$7 - Brokerage & Commissions Paid
= \$13 - Brokerage & Commissions Paid

Trading Ratio Call BackSpread Options is not that risky as compared to any other high risk option strategies like naked short calls or short puts. You are usually receiving (net credit) for a an unlimited profit potential on the upside and a limited profit potential on the downside while your loss regions are restricted to a small inverted pyramid based region.

Any big move in the stock price will directly mean profit to you - limited on the downside, but unlimited on the upside.
Any increase in volatility will mean a profit to the options trader, as increase in volatility will lead to increase in option premiums.

However, Any stability in underlying stock price movements or no movement at all, or decrease in volatility or time decay will be bad for this Call Ratio BackSpread Option position.

- Trader needs to take atleast 3 option positions at the entry and close all 3 at the exit. That will mean high cost of brokerage which may eat into your profits.

- The option trader needs to have a bullish or bearish outlook for trading Ratio Call BackSpread

- Time decay is harmful to the trader as there are net long positions (in terms of 2 long calls and one short).

- This being a net buyer (long) position, its advisable to trade this with longer time to expiry, so that the benefit from Time Decay is minimum. see (Options Time Decay: Explained with Examples)

Let's continue further to the Greeks for Ratio Call BackSpread Option: Delta, Gamma, Rho, Vega, Theta
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