Call Backspread
Sell 1 ITM Call / Buy 2 (or more) OTM Calls
The Call Backspread is an option strategy that provides unlimited upside profit potential and limited downside risk of loss. Buyers of Call Backspreads believe the underlying equity will rise in price before option expiration but there is also the potential of a small profit even if the underlying equity drops in price.
1:2 ratio call backspreads can typically be opened for a net credit.
Consider the following hypothetical example for a stock trading at $27.52.
Purchasing 1 $27 call and selling 2 $28 calls results in a credit of $19. There are two potential profit scenarios in this spread.
The first is if the underlying equity closes less than $27.19 at option expiration; the maximum profit (or loss if opened at a debit) is the net amount received (or paid) from opening the spread. In this case, it would be $19 profit if the stock closes below $27.
The second is if the underlying equity closes above $28.81 at option expiration; the maximum profit in this instance is unlimited.
The maximum loss is the difference between the option strike prices less any credit received (or plus any debit paid) to open the position and occurs at the OTM strike price. Here, a maximum loss of $81 is incurred if the stock closes exactly at $28.
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The opposite of this strategy is the Put Backspread in which case puts are used instead of calls.
