Call Ratio Spread Option Strategy – Reliance Capital

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)

Call Ratio Spread Option Strategy - Reliance Capital

Call Ratio Spread Option Strategy – Reliance Capital

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

 

Update:

Will keep updating the status of the trade here,

Posted in Options and tagged , , .

8 Comments

  1. I’m thinking, it is great strategy as we will be getting near about 39K even if it goes down or sideways. But by looking at charts it has broken it’s all time high and looks like to be more bullish. But the considering the position you created it has very good risk reward ratio.

  2. One of the concern was the IVP and IV are not so that great to make this trade. I assume if we keeping the time frame short, we could get the profit. I stead of this I was looking at BANKINDIA as Put Bear Spread/ Credit Put Spread which was also nicer. As i do understand it’s all about comfort for each individual.

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