What is Call Backspread?

The Call Backspread is reverse of call ratio spread. It is bullish strategy that involves selling options at lower strikes and buying higher number of options at higher strikes of the same underlying stock. It is unlimited profit and limited risk strategy.

When to initiate the Call Backspread

The Call Backspread is used when an option trader thinks that the underlying asset will experience significant upside movement in the near term.

How to construct the Call Backspread?

• Sell 1 ITM/ATM Call

• Buy 2 OTM Call

The Call Backspread is implemented by selling one In-the-Money (ITM) or At-the-Money (ATM) call option and simultaneously buying two Out-the-Money (OTM) call options of the same underlying asset with the same expiry. Strike price can be customized as per the convenience of the trader.

Strategy	Call Backspread
Market Outlook	Significant upside movement
Upper Breakeven	Long call strikes + Difference between long and short strikes -/+ net premium received or paid
Lower Breakeven	Strike price of Short call +/- net premium paid or received
Risk	Limited
Reward	Unlimited (when Underlying price > strike price of buy call)
Margin required	Yes

Let’s try to understand with an Example:

NIFTY Current market Price Rs	9300
Sell ATM Call (Strike Price) Rs	9300
Premium Received (per share) Rs	140
Buy OTM Call (Strike Price) Rs	9400
Premium Paid (per lot) Rs	70
Net Premium Paid/Received	0
Upper BEP	9500
Lower BEP	9300
Lot Size	75

Suppose Nifty is trading at Rs 9300. If Mr. A believes that price will rise significantly above Rs 9400 on or before expiry, then he initiates Call Backspread by selling one lot of 9300 call strike price at Rs 140 and simultaneously buying two lot of 9400 call strike price at Rs 70. The net premium paid/received to initiate this trade is zero. Maximum profit from the above example would be unlimited if underlying assets break upper breakeven point. However, maximum loss would be limited to Rs 7,500 (100*75) and it will only occur when Nifty expires at 9400.

For the ease of understanding, we did not take in to account commission charges. Following is the payoff schedule assuming different scenarios of expiry.

The Payoff Schedule:

On Expiry NIFTY closes at	Net Payoff from 9300 Call Sold (Rs)	Net Payoff from 9400 Call Bought (Rs) (2Lots)	Net Payoff (Rs)
9000	140	-140	0
9100	140	-140	0
9200	140	-140	0
9300	140	-140	0
9350	90	-140	-50
9400	40	-140	-100
9450	-10	-40	-50
9500	-60	60	0
9600	-160	260	100
9700	-260	460	200
9800	-360	660	300
9900	-460	860	400

The Payoff Graph:

Impact of Options Greeks:

Delta: If the net premium is received from the Call Backspread, then the Delta would be negative, which means even if the underlying assets falls below lower BEP, profit will be the net premium received.

If the net premium is paid then the Delta would be positive which means any upside movement will result into profit.

Vega: The Call Backspread has a positive Vega, which means an increase in implied volatility will have a positive impact.

Theta: With the passage of time, Theta will have a negative impact on the strategy because option premium will erode as the expiration dates draws nearer.

Gamma: The Call Backspread has a long Gamma position, which means any major upside movement will benefit this strategy.

How to manage risk?

The Call Backspread is exposed to limited risk; hence one can carry overnight position.

Analysis of Call Backspread:

The Call Backspread is best to use when an investor is extremely bullish because investor will make maximum profit only when stock price expires above higher (bought) strike.