Call Ratio Front Spread

Volatility Spreads Ratio Spreads Call Ratio Front Spread

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

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 –