Call Ratio Spread Option Strategy – ASHOKLEY

A Call Ratio Spread option strategy is neutral to a slightly bullish strategy created by buying one ATM or one slight OTM call and by selling two further OTM calls. The strategy gives us a net credit and thereby eliminating any downside risk if placed properly. It is important that you have a directional assumption that the stock will be sideways or move up slightly during the contract expiry.

This strategy has a high probability of profit when placed under high implied volatility (IV) conditions. As of previous day, Ashok Leyland (ASHOKLEY) has a high IV percentile of 96.6 when measuring over last 6 months & therefore an ideal time to place this strategy. You can track IV Percentiles here

Today, I’m placing a call ratio spread using ASHOKLEY options. My neutral to the slightly bullish assumption for this stock is due to good sales numbers in recent times and a bullish price action post that. I’m expecting the stock to move further upside or stay sideways at the present levels.

Call Ratio Spread Setup of ASHOKLEY:

Ashokley lot-size – 7000
> Buy an ATM or OTM call option – We buy one 107.5CE of Ashokley option at  2.1
> Short two further OTM call options at a higher strike – We short two 110CE Ashokley options at 1.45

So, we receive a net credit of Rs 0.8  (Credit of 110CE 2×1.45 minus debit of 110CE 2.1)

Payoff for call spread ratio of Ashokley at expiry is shown in the figure

Call Ratio Spread- Ashokley

Call Ratio Spread- Ashokley

Maximum profit for this strategy, in this case, is the distance between long strike and short strike + credit received, which in this case when calculated is Rs 23,100 (3.3*7000)

Breakeven for this strategy is short strike call plus the profit potential, which in this case is 113.3 (110+3.3), a good 7% away from the current spot price of the stock giving ample protection on the upside in case of a sharp move.

Management of Call Ratio Spread

We will exit the trade if the stock price tests & goes beyond the break-even level of 113.3.

The target for this trade is 50% of the maximum profit potential or wait till expiry if stock’s price action works in our favor, whichever happens first.

Update

Exited the position with 4.9K profit.

 

Posted in Options.

2 Comments

  1. Hi Raghunath, I have been reading material related to High IV and take trade. Look like i saw somewhere you speak about tasty trade. I’m very much fan of tasty trade, try to make my position non directional. Managing my risk and position . Just wanted to know whatever tasty trade do in there in US market does it get follow here in India too ?

    • These option strategy concepts have been there for decades. Its only that tasty trade presents it better & does extensive research on what parameters, conditions etc to use to squeeze out more profit.

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