Imagine a trade where you can profit from a big upward move with unlimited potential, lose only a small amount if the stock goes sideways, and even make a little money if the stock drops. The call ratio backspread offers exactly this profile. In this guide, we will explain how this powerful but underutilized strategy works.
What is a Call Ratio Backspread?
A call ratio backspread involves selling one call option at a lower strike and buying multiple call options at a higher strike. The typical ratio is 1:2, meaning you sell one call and buy two. This creates a position that profits most from a large upward move but has limited risk if wrong.
The simple version: You sell one lower-strike call and buy two higher-strike calls. You want the stock to move big to the upside, where you have unlimited profit potential.
How to Construct a Call Ratio Backspread
The standard setup uses a 1:2 ratio:
- Sell 1 ITM or ATM call option
- Buy 2 OTM call options
- Same expiration date for all options
Example
Stock XYZ is trading at $50. You expect a big move higher.
- Sell 1 $50 call for $4.00
- Buy 2 $55 calls for $2.00 each ($4.00 total)
- Net cost: $0 (even money trade)
If the stock rallies hard, your two long calls make unlimited profits.
Understanding the Payoff Profile
This strategy has a unique risk-reward shape:
If the Stock Rises to $70
- Short $50 call is worth $20 against you
- Two $55 calls are worth $15 each ($30 total)
- Net profit: $30 - $20 = $10 per share ($1,000)
If the Stock Stays at $50
- All options expire worthless
- You break even (if you entered for even money)
If the Stock Rises to $55 (Maximum Loss Point)
- Short $50 call is worth $5
- Long $55 calls expire worthless
- Net loss: $5 per share ($500)
If the Stock Falls to $40
- All options expire worthless
- You break even (if you entered for even money)
Calculating Breakeven Points
A call ratio backspread has two breakeven points when entered at even money:
- Lower breakeven: Equal to the lower strike if entered for even money ($50)
- Upper breakeven: Long strike + (spread width x number of long calls) / (long calls - short calls) = $55 + ($5 x 2) / 1 = $65
Above $65, you profit dollar-for-dollar on the extra long call.
Why Use a Call Ratio Backspread?
This strategy excels in specific situations:
- Expecting a big move: You think the stock could rally significantly
- Before catalysts: Earnings, FDA decisions, or other binary events
- Low implied volatility: Options are cheap, making this trade affordable
- Uncertain timing: You are bullish but not sure when the move will happen
Entering for a Credit
You can structure the backspread to receive a net credit:
Credit Entry Example
Stock at $50:
- Sell 1 $48 call for $5.00
- Buy 2 $55 calls for $2.00 each ($4.00 total)
- Net credit: $1.00 ($100)
If the stock drops, you keep the $100 credit. Your max loss is if the stock lands at $55.
Greeks and Position Management
Understanding the Greeks helps manage this position:
- Delta: Net positive delta that increases as the stock rises above the long strikes
- Gamma: Positive gamma means you benefit from big moves
- Theta: Time decay works against you in the danger zone near the long strike
- Vega: Positive vega means rising volatility helps your position
Best Time to Enter
Timing matters for ratio backspreads:
- Low implied volatility: Enter when IV is low and you expect it to increase
- Before known catalysts: Earnings, product launches, or regulatory decisions
- Sufficient time to expiration: Give yourself at least 30-60 days for the move to happen
Adjusting Your Position
You can modify the trade as conditions change:
- Stock rallying: Consider selling one of your long calls to lock in profit
- Stock falling: If you received a credit, you can let it expire worthless
- Near max loss point: Roll out in time or close for a loss to avoid max pain
- Volatility spike: Close the trade to capture vega gains
Call Ratio Backspread vs Long Call
How does this compare to simply buying calls?
- Cost: Backspread can be entered for free or a credit; long call requires premium
- Breakeven: Backspread may have lower breakeven; long call needs stock above strike plus premium
- Max loss: Backspread has max loss in the middle; long call max loss is premium paid
- Best for: Backspread is better for big move expectations; long call for steady rallies
Common Mistakes to Avoid
- Using when expecting small moves: This strategy needs big moves to profit
- Too little time to expiration: Time decay will hurt if the move is delayed
- Ignoring the danger zone: Be aware of max loss near the long strikes
- Wrong ratio: 1:2 is standard; other ratios change the risk profile significantly
Track Your Ratio Spreads
Pro Trader Dashboard shows your P/L graph, Greeks, and breakeven points for complex multi-leg positions. Visualize your trades before you enter them.
Summary
The call ratio backspread is an advanced strategy for traders expecting large upward moves. By selling one lower-strike call and buying two higher-strike calls, you create unlimited upside potential with limited risk. The trade-off is a zone of maximum loss if the stock ends up right at your long strikes. Use this strategy before catalysts when you expect volatility to spike and the stock to rally hard.
Want to learn the bearish version? Check out our guide on put ratio backspreads or explore strip strategies for another volatility play.