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# Chapter 6 Bullish Option Strategies

## Bullish Option Strategies

## How to make profit using bullish option trading strategies?

## Long Call

### When to initiate a Long call?

### Why to use the Long call

### Analysis Of Long Call Strategy:

## Short Put Options Trading Strategy

### What is short put option strategy?

### When to initiate a short put?

### Analysis of Short Put Option Trading Strategy

## Bull Put Spread

### What is Bull Put Spread Option strategy?

### When to initiate Bull Put Spread

### How to Construct the Bull Put Spread?

### Probability of making money

### Payoff diagram

### Impact of Options Greeks:

### How to manage Risk?

### Analysis of Bull Put Spread Options strategy:

## Long Call Ladder Options Strategy

### When to initiate a Long Call Ladder

### How to construct a Long Call Ladder?

### The Payoff chart:

### The Payoff Schedule

### Impact of Options Greeks:

### How to manage Risk?

## What Is Covered Call Options Trading Strategy?

### How should you use the covered call Options Trading strategy?

### Let’s try to understand the Covered Call Options Trading Strategy with an Example:

### Analysis of Covered Call trading Strategy:

## What is Call Backspread?

### When to initiate the Call Backspread

### How to construct the Call Backspread?

### Let’s try to understand with an Example:

### The Payoff Schedule:

### The Payoff Graph:

### Impact of Options Greeks:

### How to manage risk?

### Analysis of Call Backspread:

## What is Stock Repair strategy?

### Why to Initiate Stock Repair strategy?

### Who can initiate Stock Repair strategy?

### Stock Repair strategy?

### How to Construct the Stock Repair strategy?

### Let’s try to understand with an example:

### Comparison:

### The Payoff chart:

### Analysis of Stock Repair strategy:

## Call Ratio Spread Explained

### What is Call Ratio Spread?

### When to initiate the Call Ratio Spread

### How to construct the Call Ratio Spread?

### Let’s try to understand with an Example:

### The Payoff Schedule:

### The Payoff Graph:

### Impact of Options Greeks:

### How to manage risk?

### Analysis of Call Ratio Spread:

Bullish options trading strategies are used when options trader expects the underlying assets to rise. It is very important to determine how much the underlying price will move higher and the timeframe in which the rally will occur in order to select the best options strategy. The simplest way to make profit from rising prices using options is to buy calls. However, buying call is not necessarily the best way to make money in moderately or mildly bullish market. Following are the most popular bullish strategies that can be used depend upon different scenarios.

- Long Call Strategy
- Short Put Strategy
- Bull Put Spread
- Long Call Ladder Strategy
- Covered Call Strategy
- Call Back –Spread Strategy
- Stock Repair Strategy
- Call Ratio Spread

Long call is best used when you expect the underlying asset to increase significantly in a relatively short period of time. It would still benefit if you expect the underlying asset to rise slowly. However, one should be aware of the time decay factor, because the time value of call will reduce over a period of time as you reach near to expiry.

This is a good strategy to use because downside risk is limited only up to the premium/cost of the call you pay, no matter how much the underlying asset drops. It also gives you the flexibility to select risk to reward ratio by choosing the strike price of the options contract you buy.

Strategy | Buy/Long Call Option |
---|---|

Market Outlook | Extremely Bullish |

Breakeven at expiry | Strike price + Premium paid |

Risk | Limited to premium paid |

Reward | Unlimited |

Margin required | No |

**Let’s try to understand with an Example:**

Current ABC Ltd Price | 8200 |
---|---|

Strike price | 8200 |

Premium Paid (per share) | 60 |

BEP (strike Price + Premium paid) | 8260 |

Lot size | 75 |

Suppose the stock of ABC Ltd is trading at Rs. 8,200. A call option contract with a strike price of Rs. 8,200 is trading at Rs. 60. If you expect that the price of ABC Ltd will rise significantly in the coming weeks, and you paid Rs. 4,500 (75*60) to purchase single call option covering 75 shares. So, as expected, if ABC Ltd rallies to Rs. 8,300 on options expiration date, then you can sell immediately in the open market for Rs. 100 per share. As each option contract covers 75 shares, the total amount you will receive is Rs. 7,500. Since you had paid Rs. 4,500 to purchase the call option, your net profit for the entire trade is, therefore Rs. 3,000. For the ease of understanding, we did not take into account commission charges.

Long call strategy limits the downside risk to the premium paid which is coming around Rs. 60 per share in the above example, whereas potential return is unlimited if ABC Ltd moves higher significantly. It is perfectly suitable for traders who don’t have a huge capital to invest but could potentially make much bigger returns than investing the same amount directly in the underlying security.

A short put is the opposite of buy put option. With this option trading strategy, you are obliged to buy the underlying security at a fixed price in the future. This option trading strategy has a low profit potential if the stock trades above the strike price and exposed to high risk if stock goes down. It is also helpful when you expect implied volatility to fall, that will decrease the price of the option you sold.

A short put is best used when you expect the underlying asset to rise moderately. It would still benefit if the underlying asset remains at the same level, because the time decay factor will always be in your favour as the time value of put will reduce over a period of time as you reach near to expiry. This is a good option trading strategy to use because it gives you upfront credit, which will help to somewhat offset the margin.

Strategy | Short Put Option |
---|---|

Market Outlook | Bullish or Neutral |

Breakeven at expiry | Strike price - Premium received |

Risk | Unlimited |

Reward | Limited to premium received |

Margin required | Yes |

**Let’s try to understand with an Example:**

Current Nifty Price | 8300 |
---|---|

Strike price | 8200 |

Premium received (per share) | 80 |

BEP (strike Price - Premium paid) | 8120 |

Lot size | 75 |

Suppose Nifty is trading at Rs. 8300. A put option contract with a strike price of 8200 is trading at Rs. 80. If you expect that the price of Nifty will surge in the coming weeks, so you will sell 8200 strike and receive upfront profit of Rs.6,000 (75*80). This transaction will result in net credit because you will receive the money in your broking account for writing the put option. This will be the maximum amount that you will gain if the option expires worthless. If the market moves against you, then you should have a stop loss based on your risk appetite to avoid unlimited loss.

So, as expected, if Nifty Increases to 8400 or higher by expiration, the options will be out of the money at expiration and therefore expire worthless. You will not have any further liability and amount of Rs.6000 (75*80) will be your maximum profit. If Nifty goes against your expectation and falls to 7800 then the loss would be amount to Rs.24000 (75*320). Following is the payoff schedule assuming different scenarios of expiry. For the ease of understanding, we did not take into account commission charges and Margin.

A short put options trading strategy can help in generating regular income in a rising or sideways market but it does carry significant risk and it is not suitable for beginner traders. It’s also not a good strategy to use if you expect underlying assets to rise quickly in a short period of time; instead one should try long call trade strategy.

A Bull Put Spread involves one short put with higher strike price and one long put with lower strike price of the same expiration date. A Bull Put Spread is initiated with flat to positive view in the underlying assets.

Bull Put Spread Option strategy is used when the option trader believes that the underlying assets will rise moderately or hold steady in the near term. It consists of two put options – short and long put. Short put’s main purpose is to generate income, whereas long put is bought to limit the downside risk.

Bull Put Spread is implemented by selling At-the-Money (ATM) Put option and simultaneously buying Out-the-Money (OTM) Put option of the same underlying security with the same expiry. Strike price can be customized as per the convenience of the trader.

A Bull Put Spread has a higher probability of making money as compared to Bull Call Spread. The probability of making money is 67% because Bull Put Spread will be profitable even if the underlying assets holds steady or rise. While, Bull Call Spread has probability of only 33% because it will be profitable only when the underlying assets rise.

Strategy | Sell 1 ATM Put and Buy 1 OTM Put |
---|---|

Market Outlook | Neutral to Bullish |

Motive | Earn income with limited risk |

Breakeven at expiry | Strike Price of Short Put - Net Premium received |

Risk | Difference between two strikes - premium received |

Reward | Limited to premium received |

Margin required | Yes |

**Let’s try to understand with an example:**

Nifty Current spot price (Rs) | 9300 |
---|---|

Sell 1 ATM Put of strike price (Rs) | 9300 |

Premium received (Rs) | 105 |

Buy 1 OTM Put of strike price (Rs) | 9200 |

Premium paid (Rs) | 55 |

Break Even point (BEP) | 9250 |

Lot Size | 75 |

Net Premium Received (Rs) | 50 |

Suppose Nifty is trading at Rs.9300. If Mr. A believes that price will rise above 9300 or hold steady on or before the expiry, so he enters Bull Put Spread by selling 9300 Put strike price at Rs.105 and simultaneously buying 9200 Put strike price at Rs.55. The net premium received to initiate this trade is Rs.50. Maximum profit from the above example would be Rs.3750 (50*75). It would only occur when the underlying assets expires at or above 9300. In this case, both long and short put options expire worthless and you can keep the net upfront credit received that is Rs.3750 in the above example. Maximum loss would also be limited if it breaches breakeven point on downside. However, loss would be limited to Rs.3750(50*75).

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

**The Payoff Schedule:**

On Expiry Nifty closes at | Payoff from Put Sold 9300 (Rs) | Payoff from Put Bought 9200 (Rs) | Net Payoff (Rs) |
---|---|---|---|

8800 | -395 | 345 | -50 |

8900 | -295 | 245 | -50 |

9000 | -195 | 145 | -50 |

9100 | -95 | 45 | -50 |

9200 | 5 | -55 | -50 |

9250 | 55 | -55 | 0 |

9300 | 105 | -55 | 50 |

9400 | 105 | -55 | 50 |

9500 | 105 | -55 | 50 |

9600 | 105 | -55 | 50 |

9700 | 105 | -55 | 50 |

**Delta:** Delta estimates how much the option price will change as the stock price changes. The net Delta of Bull Put Spread would be positive, which indicates any downside movement would result in loss.

**Vega:** Bull Put Spread has a negative Vega. Therefore, one should initiate this strategy when the volatility is high and is expected to fall.

**Theta:** Time decay will benefit this strategy as ATM strike has higher Theta as compared to OTM strike.

**Gamma:** This strategy will have a short Gamma position, so any downside movement in the underline asset will have a negative impact on the strategy.

A Bull Put Spread is exposed to limited risk; hence carrying overnight position is advisable.

A Bull Put Spread Options strategy is limited-risk, limited-reward strategy. This strategy is best to use when an investor has neutral to Bullish view on the underlying assets. The key benefit of this strategy is the probability of making money is higher as compared to Bull Call Spread.

A Long Call Ladder is the extension of bull call spread; the only difference is of an additional higher strike sold. The purpose of selling the additional strike is to reduce the cost. It is limited profit and unlimited risk strategy. It is implemented when the investor is expecting upside movement in the underlying assets till the higher strike sold. The motive behind initiating this strategy is to rightly predict the stock price till expiration and gain from time value.

A Long Call Ladder spread should be initiated when you are moderately bullish on the underlying assets and if it expires in the range of strike price sold then you can earn from time value factor. Also another instance is when the implied volatility of the underlying assets increases unexpectedly and you expect volatility to come down then you can apply Long Call Ladder strategy.

A Long Call Ladder can be created by buying 1 ITM call, selling 1 ATM call and selling 1 OTM call of the same underlying security with the same expiry. Strike price can be customized as per the convenience of the trader i.e. A trader can initiate the following trades also: Buy 1 ATM Call, Sell 1 OTM Call and Sell 1 far OTM Call.

Strategy | Buy 1 ITM Call, Sell 1 ATM Call and Sell 1 OTM Call |
---|---|

Market Outlook | Moderately bullish |

Upper Breakeven | Total strike price of short call - Strike price of long call - Net premium paid |

Lower Breakeven | Strike price of long call + Net Premium Paid |

Risk | Limited to premium paid if stock falls below lower breakeven. Unlimited if stock surges above higher breakeven. |

Reward | Limited (expiry between upper and lower breakeven) |

Margin required | Yes |

**Let’s try to understand with an example:**

Nifty Current spot price (Rs) | 9100 |
---|---|

Buy 1 ITM call of strike price (Rs) | 9000 |

Premium paid (Rs) | 180 |

Sell 1 ATM call of strike price (Rs) | 9100 |

Premium received (Rs) | 105 |

Sell 1 OTM call of strike price (Rs) | 9200 |

Premium received (Rs) | 45 |

Upper breakeven | 9270 |

Lower breakeven | 9030 |

Lot Size | 75 |

Net Premium Paid (Rs) | 30 |

Suppose Nifty is trading at 9100. An investor Mr. A thinks that Nifty will expire in the range of 9100 and 9200 strikes, so he enters a Long Call Ladder by buying 9000 call strike price at Rs.180, selling 9100 strike price at Rs.105 and selling 9200 call for Rs.45. The net premium paid to initiate this trade is Rs.30. Maximum profit from the above example would be Rs.5250 (70*75). It would only occur when the underlying assets expires in the range of strikes sold. Maximum loss would be unlimited if it breaks higher breakeven point. However, loss would be limited up to Rs.2250(30*75) if it drops below the lower breakeven point.

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

On Expiry NIFTY closes at | Payoff from 1 ITM Call Bought
(9000) (Rs) |
Payoff from 1 ATM Calls Sold
(9100) (Rs) |
Payoff from 1 OTM Call Sold
(9200) (Rs) |
Net Payoff (Rs) |
---|---|---|---|---|

8600 | -180 | 105 | 45 | -30 |

8700 | -180 | 105 | 45 | -30 |

8800 | -180 | 105 | 45 | -30 |

8900 | -180 | 105 | 45 | -30 |

9000 | -180 | 105 | 45 | -30 |

9030 | -150 | 105 | 45 | 0 |

9100 | -80 | 105 | 45 | 70 |

9200 | 20 | 5 | 45 | 70 |

9270 | 90 | -65 | -25 | 0 |

9300 | 120 | -95 | -55 | -30 |

9400 | 220 | -195 | -155 | -130 |

9500 | 320 | -295 | -255 | -230 |

9600 | 420 | -395 | -355 | -330 |

9700 | 520 | -495 | -455 | -430 |

9800 | 620 | -595 | -555 | -530 |

**Delta:** At the time of initiating this strategy, we will have a short Delta position, which indicates any significant upside movement, will lead to unlimited loss.

**Vega:** Long Call Ladder has a negative Vega. Therefore, one should buy Long Call Ladder spread when the volatility is high and expects it to decline.

**Theta:** A Long Call Ladder will benefit from Theta if it moves steadily and expires in the range of strikes sold.

**Gamma:** This strategy will have a short Gamma position, which indicates any significant upside movement, will lead to unlimited loss.

A Long Call Ladder is exposed to unlimited risk; it is advisable not to carry overnight positions. Also, one should always strictly adhere to Stop Loss in order to restrict losses.

**Analysis of Long Call Ladder Options strategy:**

A Long Call Ladder spread is best to use when you are confident that an underlying security will not move significantly and will stays in a range of strike price sold. Another scenario wherein this strategy can give profit is when there is a decrease in implied volatility.

A covered call options trading strategy is an Income generating strategy which can be initiated by simultaneously purchasing a stock and selling a call option. It can also be used by someone who is holding a stock and wants to earn income from that investment. Generally, the call option which is sold will be out-the-money and it will not get exercised unless the stock price increases above the strike price.

Choosing between strikes involves a trade-off between priorities. An investor can select higher out-the-money strike price and preserve some more upside potential. However, more out-the-money would generate less premium income, which means that there would be a smaller downside protection in case ofstock decline. The expiration month reflects the time horizon of his market view.

Strategy | Buy Stock & Sell call option |
---|---|

Market Outlook | Neutral to moderately bullish |

Breakeven(Rs.) at expiry | Stock price paid-premium received |

Maximum Risk | Stock price paid-call premium |

Reward | Limited |

Margin required | Yes |

Current ABC Ltd Price | Rs. 8500 |
---|---|

Strike price | Rs. 8700 |

Premium Received (per share) | Rs. 50 |

BEP (strike Price - Premium paid) | Rs. 8450 |

Lot size (in units) | 100 |

Let us consider the following scenario: Mr. X has purchased 100 shares of ABC Ltd. for Rs.8500 and simultaneously sells a call option with a strike price of Rs.8700 for Rs.50 which means that Mr. X does not think that price of ABC Ltd will rise above Rs.8700 till expiry. Thus, the net outflow to Mr. X is (Rs.8500-Rs.50) Rs.8450.

The upside profit potential is limited to the premium received from the call option sold plus the difference between the stock purchase price and its strike price.

In the above example, if stock price surges above the 8700 level, then the maximum profit would be calculated as:(8700-8500 +50)*100 = (250*100) = Rs. 25,000. If the stock price stays at or below Rs.8700, the call option will not get exercised and Mr. X can retain the premium of Rs. 50, which is an extra income.

For the ease of understanding, concepts such as commission, dividend, margin, tax and other transaction charges have not been included in the above example.

Any increase in volatility will have a neutral to negative impact as the option premium will increase, while a decrease in volatility will have a positive effect. Time decay will have a positive effect.

The covered call strategy is best used when an investor wishes to generate income in addition to any dividends from shares of stocks he or she owns. However, it may not be a very profitable strategy for an investor whose main interest is to gain substantial profit and who wants to protect downside risk.

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.

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

- 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 |

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.

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 |

**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.

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

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.

As the name suggests, the Stock Repair strategy is an alternative strategy to recover from loss that a stock has suffered due to fall in price. The Stock Repair strategy helps in recovering losses with just a moderate rise in the price of the underlying stock.

Stock Repair strategy is initiated to recover from the losses and exit from loss making position at breakeven of the underlying stock.

A Stock Repair strategy should be implemented by investors who are looking forward to average their position by buying additional stocks in cash when the underlying stock price is falling. Instead of buying additional stock in cash one can apply stock repair strategy.

A Stock Repair strategy should be initiated only when the stock that you are holding in your portfolio has corrected by 10-20% and only if you think that the underlying stock will rise moderately in near term.

- Buy 1 ATM call
- Sell 2 OTM calls

Stock Repair strategy is implemented by buying one At-the-Money (ATM) call option and simultaneously selling two Out-the-Money (OTM) call options strikes, which should be closest to the initial buying price of the same underlying stock with the same expiry.

Strategy | Long Stock, Buy 1 ATM Call and Sell 2 OTM Call |
---|---|

Market Outlook | Mildly Bullish |

Motive | Recover loss with limited risk |

Break even | (Strike price of buy call + strike of sell call + net premium paid)/2 |

Risk | Net premium paid, Drop in price of holding stock |

Reward | Average of difference between strike price-net premium paid |

Margin required | Yes |

DISHTV earlier Bought at Rs | 100 |
---|---|

Quantity bought | 7000 |

DISHTV Current spot price (Rs) | 90 |

Buy 1 ATM Call of strike price (Rs) | 90 |

Premium paid (Rs) | 5 |

Sell 2 OTM Call of strike price (Rs) | 100 |

OTM call price per lot (Rs) | 2 |

Premium received (Rs) (2*2) | 4 |

Break even | 95.5 |

Lot Size | 7000 |

Net Premium paid (Rs) | 1 |

For example, an investor Mr. A had bought 7000 shares of DISHTV at Rs.100 in April but the price of DISHTV has declined to Rs.90, resulting in to notional loss of Rs.70,000. Mr. A thinks that price will rise from this level so rather than doubling the quantity at current price, here he can initiate the Stock Repair strategy. This can be initiated by buying one May 90 call for Rs.5 and selling two May 100 call for Rs.2 each. The net debit paid to enter this spread is Rs.1 amounting to Rs.7000, which will be the maximum loss from repair strategy that Mr. A will face if DISHTV falls below Rs.90.

If DISHTV expires at 80 level then both the calls would expire worthless, resulting in loss of the debit paid of Rs.7000 as the net cost to initiate Stock Repair strategy is Rs.1 per lot. Had Mr A doubled his position at 90 level then he would have lost Rs.70,000 (10*7000). This shows he is much better off by applying this strategy.

If DISHTV expires at 100 level then this would be the best case scenario where maximum profit will be achieved. May 90 call bought would result in to profit of Rs.5 where as May 100 call sold will expire worthless resulting in to gain of Rs.4. Net gain would be Rs.63,000 (9*7000).

Followings are the two scenarios assuming Mr A has implemented the Stock Repair strategy whereas Mr B has doubled his position at lower level. For the ease of understanding, we did not take in to account commission charges.

Stock Repair | Normal Averaging | |||||
---|---|---|---|---|---|---|

DISHTV expires at | Payoff from stock holding at Rs 100 | Payoff from Repair Strategy | Net payoff of Mr. A | Payoff from stock holding at Rs 100 | Doubling down position payoff | Net Payoff of Mr. B |

70 | (2,10,000) | (7,000) | (2,17,000) | (2,10,000) | (1,40,000) | (3,50,000) |

80 | (1,40,000) | (7,000) | (1,47,000) | (1,40,000) | (70,000) | (2,10,000) |

90 | (70,000) | (7,000) | (77,000) | (70,000) | 0 | (70,000) |

100 | 0 | 63,000 | 63,000 | 0 | 70,000 | 70,000 |

110 | 70,000 | (7,000) | 63,000 | 70,000 | 1,40,000 | 2,10,000 |

Mr. A initiated stock repair strategy | Mr. B Doubled his position at lower level | |
---|---|---|

Margin | Only margin money is required to initiate stock repair strategy | Full amount has to be paid in cash for taking delivery of stock |

Interest Loss (1 month) | 1,50,000*0.08/12=1000 | 630000*0.08/12= 4200 |

Risk | Risk associated is limited | It involves high risk when the stock price falls |

Brokerage | Brokerage in Options is comparatively less. | Brokerage paid to initiate position is higher as compared to Options. |

The Stock Repair strategy is suitable for an investor who is holding a losing stock and wants to reduce breakeven at very little or no cost. This strategy helps in minimizing the loss at very low cost as compared to "Doubling Down" of position.

The Call Ratio Spread is a premium neutral strategy that involves buying options at lower strikes and selling higher number of options at higher strikes of the same underlying stock.

The Call Ratio Spread is used when an option trader thinks that the underlying asset will rise moderately in the near term only up to the sold strikes. This strategy is basically used to reduce the upfront costs of premium paid and in some cases upfront credit can also be received.

- Buy 1 ITM/ATM Call
- Sell 2 OTM Call

The Call Ratio Spread is implemented by buying one In-the-Money (ITM) or At-the-Money (ATM) call option and simultaneously selling 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 Ratio Spread |
---|---|

Market Outlook | Moderately bullish with less volatility |

Upper Breakeven | Difference between long and short strikes + short call strikes +/- premium received or paid |

Lower Breakeven | Strike price of long call +/- Net premium paid or received |

Risk | Unlimited |

Reward | Limited (when Underlying price = strike price of short call) |

Margin required | Yes |

NIFTY Current market Price | 9300 |
---|---|

Buy ATM Call (Strike Price) | 9300 |

Premium Paid (per share) | 140 |

Sell OTM Call (Strike Price) | 9400 |

Premium Received | 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 to Rs.9400 on expiry, then he enters Call Ratio Spread by buying one lot of 9300 call strike price at Rs.140 and simultaneously selling 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 Rs.7500 (100*75). For this strategy to succeed the underlying asset has to expire at 9400. In this case short call option strikes will expire worthless and 9300 strike will have some intrinsic value in it. However, maximum loss would be unlimited if it breaches breakeven point on upside.

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

On Expiry NIFTY closes at | Net Payoff from 9300 Call Bought (Rs) | Net Payoff from 9400 Call Sold (Rs) (2Lots) | Net Payoff (Rs) |
---|---|---|---|

8900 | -140 | 140 | 0 |

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 |

**Delta:** If the net premium is received from the Call Ratio Spread, then the Delta would be negative, which means slight upside movement will result into loss and downside movement will result into profit.

If the net premium is paid then the Delta would be positive which means any downside movement will result into premium loss, whereas a big upside movement is required to incur loss.

**Vega:** The Call Ratio Spread has a negative Vega. An increase in implied volatility will have a negative impact.

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

**Gamma:** The Call Ratio Spread has short Gamma position, which means any major upside movement will impact the profitability of the strategy.

The Call Ratio Spread is exposed to unlimited risk if underlying asset breaks higher breakeven; hence one should follow strict stop loss to limit loses.

The Call Ratio Spread is best to use when an investor is moderately bullish because investor will make maximum profit only when stock price expires at higher (sold) strike. Although investor profits will be limited if the price does not rise higher than expected sold strike.