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. This is a net credit strategy and therefore eliminates the 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.
Today, I’m placing a call ratio spread using RELCAPITAL (Reliance Capital) options. This is not a earnings results strategy. The results for Reliance Capital are already out. My neutral to the slightly bullish assumption for this stock is due to good results from the company and a bullish price action post the Q1 earnings. I’m expecting the stock to move slightly upside or stay sideways at the present levels.
Call Ratio Spread Setup of RELCAPITAL:
Reliance Capital lot-size – 1500
> Buy an ATM call option – We buy one 720CE of Reliance Capital option at 34.1
> Short two further OTM call options at a higher strike – We short two 730CE Reliance Capital options at 30.2
So, we receive a net credit of Rs 26.3(Credit of 730CE 2×30.2 minus debit of 720CE 34.1)
Here is the Pay-off for this strategy at expiry
Maximum profit for this strategy is the distance between long strike and short strike + credit received, which in this case is Rs 54,450(36.3*1500)
Breakeven for this strategy is short strike call plus the profit potential, which in this case is 766.3 (730+26.3), a good 6.58% away from the current spot price of the stock giving enough protection on the upside in case of a sharp move.
Best part of this current trade is that there is risk if the stock moves to the downside & even the limited profit potential on the downside is still higher at 39.45K
Will keep updating the status of the trade here,