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Ratio Call Spread | PFG Futures

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Ratio Call Spread

Class: Precision

Synthetics: Long Call A, Short Calls B

Long Put A, short Calls B, Long instrument.

(All done to initial delta neutrality)

Ratio Call Spread | PFG Futures

When to use:

Usually entered when market is near A and user expects a

slight rise in the market but sees a potential for sell-off.

One of the most common spreads, seldom done more than

1:3 (two excess shorts) because of upside risk.

Profit Characteristics:

Maximum profit, in amount of B – A – net cost of position

( for call-vs.-call version), realized if market is at B at

expiration.

Loss Characteristics:

Loss limited on downside (to net cost of position in call vs.

call) but open-ended if market rises. Rate of loss, if market

rises beyond B, is proportional to number of excess shorts in

position.

Decay Characteristics:

If market is at B, profit from option decay accelerate the most

rapidly with passage of time. At A, you have the greatest rate

of loss accrual by decay of long option.

See also  Australia Wheat Table