Long Ratio Vertical Call Spread

Overview:

Vertical spreads got their name from the days when traders would trade on the open floor – all of the quotes would be listed vertically. The strategy is employed with the purchase of an in-the-money call option and the simultaneous sale of two deeper in-the-money call options. All of the options will expire in the same month.

Main Uses:

1. The first reason an investor would trade this strategy is if the investor is only slightly bullish about the underlying stock. The investor is hoping the stock will have a small increase in price but then doesn’t increase past the break-even point. Employing a ratio vertical spread with calls is less expensive than purchasing the calls outright.
2. The second reason an investor would employ this strategy is to gain additional leverage.

Profit / Loss Calculator:

The below graph is a profit / loss graph of a long ratio vertical spread with calls using the OptionsHouse P&L calculator. The current stock price is at $113.18. An in-the-money call option was purchased with a strike price of $117. Two deeper in-the-money call options were sold with a strike price of $119. If the stock increases higher than $121.12, the investor will lose money. If the stock remains under $121.12, the investor will make money.

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