Mastering Derivatives: Setting up ratio bull call spread
AI Summary
The ratio bull call spread presents an intriguing opportunity for bullish investors, especially in a low implied volatility environment. By leveraging two long calls at a lower strike, investors can enhance their profit potential while mitigating the impact of time decay, which is crucial during periods of declining prices. Retail investors should consider this strategy as a tactical approach to capitalize on potential reversals, especially when technical indicators suggest a shift in market sentiment.
A bull call spread involves going long on a lower strike call and short on a higher strike call of the same expiry on the same underlying. What if you instead go long on two contracts of the lower strike call and short one contract of the higher strike call? This week, we discuss the ratio bull call spread and explore the conditions under which initiating the strategy may be optimal.
Your outlook on the underlying must be bullish. But why a ratio bull call spread instead of a bull call spread? Suppose the implied volatility of calls is lower compared to the recent past, it means calls are trading cheap. This can improve your potential reward if you go long on two contracts of the lower strike call. Why? A long position is exposed to time decay — loss in time value with each passing day. Now, time value, and therefore time decay, is a function of the demand for a strike at a given point in time. The higher the demand, the greater the time value. And the greater the time value, the larger the time decay. Conversely, buying calls when implied volatility is lower leads to lower losses from time decay.
Original Article
Published on Hindu BusinessLine
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This is a results news update from Hindu BusinessLine, published on 26 September 2026.
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