Call Ratio Backspread

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Call Ratio Backspread

A bullish investment strategy in which an investor sells a call option at a low strike price and then uses the proceeds from that sale to buy two call options at a higher strike price. The calls have the same underlying security or asset, and ideally have the same premiums; importantly, they must have the same expiration date. If the underlying moves modestly in the direction the trader wants, he/she can realize exceptional profits; however, even if the underlying moves away from the trader, he/she can make a small profit or at least break even. This is a hedging strategy in which the investor is likely to attain neither significant profit nor loss, but may return a modest profit. Risk is limited to the premiums of the calls bought, and profits are theoretically (though rarely actually) unlimited. This is a favored investment strategy of many risk-averse option traders. See also: Put Ratio Backspread.