Content
A Front Ratio Call Spread is an options strategy that involves buying one At-the-Money (ATM) call option and selling two Out-of-the-Money (OTM) call options of the same expiry. This strategy is implemented when a trader expects the market to remain neutral or moderately bullish. It is structured to benefit from a rise in the underlying up to a certain level, while also generating a net credit at initiation.
Since the trader sells more options than they buy, the strategy earns a net premium upfront. It generates maximum profit when the underlying rises slightly toward the short call strike at expiry. However, if the underlying moves sharply higher beyond the breakeven level, the uncovered short call can lead to unlimited losses.
This is a strategy best suited for experienced options traders who can manage risk and make adjustments if the underlying begins trending strongly upward. Let’s understand the concept with the help of an example:
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Front Ratio Call Spread Strategy Setup
Let’s assume Nifty is trading at 23,000. Here’s how a Front Ratio Call Spread can be constructed:
| Action |
Option Type |
Strike Price |
Premium Paid / Collected (₹) |
| Buy |
Call Option |
23,000 |
220 (paid) |
| Sell |
Call Option × 2 |
23,200 |
140 × 2 = 280 (collected) |
Net Premium Received
Premium received from two short calls = ₹140 × 2 = ₹280
Premium paid for one long call = ₹220
Net Premium = ₹280 − ₹220 = ₹60 (credit)
This ₹60 is the upfront premium received for initiating the trade and represents the maximum gain if Nifty stays just below the short strike (23,200) at expiry.
Profit Scenario
Maximum profit occurs when Nifty closes near the strike of the short calls (23,200) on expiry. The 23,000 long call will have an intrinsic value of ₹200, while both 23,200 short calls expire worthless. Including the net premium, the total profit is:
Max Profit = (₹200 + ₹60) × 50 = ₹13,000
If Nifty stays at or below 23,000 at expiry, all options expire worthless, and the trader keeps the premium:
Profit = ₹60 × 50 = ₹3,000
Breakeven Point
The breakeven point is where the loss from the uncovered short call starts to exceed the total premium received and the long call’s gains.
Breakeven = Strike of Short Call + Max Profit per lot
Max profit per lot = ₹260
Breakeven = 23,200 + 260 = ₹23,460
Loss Scenario
The maximum loss occurs when Nifty rises sharply above 23,460. While the 23,000 long call covers gains up to a point, the second short call remains unhedged and results in unlimited loss as the price continues to rise.
Max Loss = Unlimited above ₹23,460
The Bottom Line
The Front Ratio Call Spread is a net credit strategy that works well in neutral to slightly bullish markets. It offers limited profit potential with an attractive breakeven cushion due to the credit received. However, the upside risk becomes significant and unlimited beyond the breakeven point, making it essential for traders to monitor their positions closely.
This strategy is ideal when you believe the market will rise modestly but not rally aggressively. Due to the risk of uncovered calls, it should only be used by traders who understand risk management and have the discipline to adjust or exit positions if needed.
