A Call Ratio Spread is neutral to a slightly bullish strategy that is 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 limiting the downside risk. It is important that you have a directional assumption that the stock will stay here or move up slightly during the contract expiry.
This strategy has a good probability of profit when placed under high implied volatility (IV) conditions. As of previous day, Biocon has an IV percentile of 95.56 when measuring over last 6 months. This IV percentile ranking is very high & therefore an ideal time to place this strategy. Track IV Percentiles here
Today, I’m placing a call ratio spread using Biocon options. The neutral to the slightly bullish assumption for this stock is due to multiple all-time highs in the stock price in the recent times. I’m expecting the stock to move further upside or stay sideways at the present levels.
The good part of this strategy is that if stock undergoes a major correction, there is no downside risk but there will be limited profit. The risky part of this strategy is that the stock shouldn’t move too much on the upside which will lead to a loss in this strategy.
This is where price action of the stock comes into the picture. My assumption is that the Biocon stock may not make a sharp move to the upside as it has already moved far beyond the two-standard deviation of the upper Bollinger band and therefore has limited upside.
Call Ratio Spread Setup of Biocon:
Biocon lot-size – 1800
> Buy an ATM or OTM call option – We buy one 410CE of Biocon option at 11.55
> Short two further OTM call options at a higher strike – We short two 420CE Biocon options at 7.65
So, we receive a net credit of Rs 3.75 (Credit of 420CE 2×7.65 minus debit of 410CE 11.55)
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 24,750 (13.75 *1800)
Breakeven for this strategy is short strike call plus the profit potential, which in this case is 433.75 (420+13.75).
Explore all options strategies including call ratio spread here – option strategies
We are presently at a point in the call ratio spread strategy where we get a limited profit as the stock has corrected & moved to the downside. We will gain more profit if the stock moves closer to 420 but with this month’s expiry in 2 days this seems unlikely. So squaring off the positions here & exiting with a profit of Rs 5850.
Sold 410CE at 2.4 – Loss of 9.15 (11.55-2.4)
Covered 2 lots 420CE at 1.45 – profit of 12.4 (7.64-1.45 * 2)
Net Profit = 12.4-9.15 = 3.25 * 1800 (lot size) = Rs 5850