Call Ratio Front Spread is a neutral to bearish strategy with no upside risk. It is doing by selling a far OTM call option to Long Call Vertical Spread. It is also known as the 1CE2CE Strategy.
Setup:
- Buy ATM/OTM Call Option – 1 Lot
- Sell Far OTM Call Options – 2 Lots
Ideal IV Environment: High
Maximum Profit: Distance between the strikes + Credit received
How to Calculate Breakeven(s):
- Upside: Short Call Strike + Maximum Profit Potential (Maximum Profit/Lot Size)
- Downside: None
Same Strike for Distant OTM Calls:
- If both of the sold distant OTM calls are at the same strike, the strategy remains a Call Ratio Front Spread.
- This approach simplifies the management and understanding of the position, as both sold calls react similarly to changes in the underlying asset’s price.
Example:
- Short 32000CE at 70.5 – 2 Lot
- Buy 31900CE at 110 – 1 Lot
![](https://lh7-us.googleusercontent.com/0HZS9XXHRZW2kzL9eb-JMBmgWbT_uTt5QvKjCF8JiCf8h0LKZD6c78u_u7WEpD0m5r2AY7l7Jil_v1gnlShOovPbdw9gQk7WaizmlqniNZYK6wNN-fwjXgPXTXixfYfilzxBBdbpxRb_to99ZErB1iU)
Apart from Ratio Spread and Frontspread, This specific example can also be called –
- Long Spread as it is a net credit spread.
- Call Spread as it only has call options.
- Bullish Spread as the bet for market direction is upside.
The maximum loss is in upside. So, if we take a deep OTM CE buy, it will become a Broken Wing Call Butterfly.
Different Strikes for Distant OTM Calls:
- If the sold distant OTM calls are at different strikes, it’s still essentially a Call Ratio Front Spread.
- This variation adds a layer of complexity to the strategy. The different strike prices can be chosen to fine-tune the risk and reward profile based on specific market expectations.
Example –
When we construct strangles instead of straddles in a similar manner we have done for Ratio Spread we get the following –
- Buy 640CE at 16.9 – 1 Lot
- Short 660CE at 10.1 – 1 Lot
- Short 680CE at 6.05 – 1 Lot
![](https://lh7-us.googleusercontent.com/e3TMOoJ6-u8AB4eajYsJNuYON4xdeKjrBlJkeeDCPQWHBNh62Z7824zNBbY7lKpgLbCDE0nMr9RARzSO1N1P0Xwy505nSl2CTzTo6omVARS1-E-4ostCP4NhK6sVYTLKaptTTJ1aa3-7wtg58tNa7Ow)
The payoff graph looks like –![](https://lh7-us.googleusercontent.com/ZuPOOLmW1vwYlbL-9McWkm_qCWs6HYBzD5RCPYKGtONDlD3HCYgGJZhv7e0C8BUSGWm7y92kq6rJDua_pncszmsW49DY-38yj5DO0PRBtdI6ONoHAa7KvlBVpQ8LzibhGe84pTzCU6r_zBw_D6nd23U)
Apart from Ratio Spread and Frontspread, This specific example can also be called –
- Short Spread as it is a net credit spread.
- Call Spread as it only has call options.
- Bullish Spread as the bet for market direction is upside.
The maximum loss is in upside. So, if we take a deep OTM PE buy, it will become a Broken Wing Call Condor.