Call Ratio Spread strategy in Option trading - Stock market technical analysis #shorts #krinu

Ratio Spreads:
Ratio spread is a strategy which involves unequal number of options bought and sold normally its 2:1

in Call ratio spread an investor constructs this strategy with these two Contracts

1. Buys an In The Money (ITM) Call option at a lower strike and pays the premium
2. Sells or writes two Out of The Money (OTM) Call Option at a Higher strike and Receives the premium

Which results in a net credit to his account (Premium received - Premium paid X Lot size)

here in this example the ratio is 2:1 an investor can also construct using 2 call buys vs 4 Call writes, thus constructing 4:2 ratio or can also use 6:3 respectively ; the thumb rule is the ratio must be unequal always for effective results

Case 1:

If Nifty is bullish and say it trades above the break even of Leg-2 (two calls sold) at expiry

he incurs a Loss from Leg-2 this loss is some how compensated by the gain from Leg-1

Case:2

If Nifty is bearish and say it trades below the break even of Leg-1 (One call option Bought) at Expiry

he incurs Loss from Leg-1 some what compensated by the gain from Leg-2

Case -3

If Nifty is neutral or side ways or in other words it trades with in the range of Leg-1 and Leg-2 break even's ,

he makes profit from both the legs (Leg-1 & Leg-2) or we can say he makes a maximum profit from this strategy
Call ratio spread is a neutral strategy used when the Volatility in the markets is expected to cool off .
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