Call Ratio Spread Debit
The ratio call spread for debit is the same strategy as the ratio call spread credit. But now, the upper and lower strike price are farther apart. This change gives different mathematical results as you can see on the chart.
If you didn’t read the previous post, please do.
In the chart we see a ratio spread of 2:1, in this case, the options that were sold are now worth less than the call that was bought. So this position is now with debit.
Inputs: MA (Mastercard)
Debit paid -> 3.8 (-$380 for one position)
Stock price -> 338
Upper strike -> 350 , 2 calls sold
Lower strike -> 330 , 1 call bought
Days to expire -> 36
Implied Volatility -> 0.309 (30.9%)
Date -> 12/11/2020
The Debit paid is $380, the maximum profit is $1620 with less than 1% probability, the maximum loss is theoretically unlimited.
In this example, one call was bought at 330 strike price for 12.7 and two calls were sold at 350 strike price for 4.45 each, in total 8.9.
The debit = 8.9-12.7 = (-3.8)
If at expiration the stock price will be below the lower strike (330), all of the options will be worthless and the loss will be only (-$380).
Maximum profit = Difference between strike – debit paid = 350-330 – 3.8 = 16.2
This position is neutral.
At the expiration:
Between 333.8 to 366.2 the position will be with a profit. $0 - $1620
Under 330.17 the position will lose (-$380) no matter what price.
Above 369.80 the risk is getting bigger.