Hey Folks! How’s your trading going? I’m trying to share one options strategy every week to help our fellow traders. Today I’m sharing a Call Ratio Spread Strategy in ITC & HCLTECH for the 28th October 2021 expiry.
Call Ration Spread strategy is an unlimited risk strategy, so we have to be a little cautious when trading with this strategy. If you choose wisely, this strategy can give you some decent returns in a very short time.
In this article, I will share some of the rules or setups you can follow to make it a high probability option strategy.
Before you start trading this call ratio spread strategy in your account, I want to share some important points related to option strategies here.
- Before you start any live trading, You must understand all the logic and the factors behind these strategies.
- You must have basic knowledge about option pricing. Like what are the greeks? What are the intrinsic value and the Implied volatility?
- Last but not the least, How these factors will affect your option pricing?
Basic knowledge about the factors will help to manage your option strategy in a proper way.
I believe We make money not because of a good trade but from proper trade management. And if you want to manage your trade well, You should learn these basic terms first. It will help to make some better decisions which will boost your confidence.
Let’s back again to our Call ratio spread strategy.
What is the Call Ratio Spread Strategy?
Call ratio spread Strategy is an unlimited risk strategy. It can give you a very good return if choose wisely. Let’s look at the formation of the Call Ratio Spread Strategy.
In Call Ratio Spread, We are buying one ATM/OTM Call and selling 2 further OTM Calls. Because we are buying and selling in ratios like 1:2, 2:3, etc… that’s why it’s called a Ratio Spread.
You can optimize it based on the view like If you are expecting a range-bound activity or any downside movement. you can make it a Net credit spread.
It is advisable that you should create this strategy in those stocks that are trading near to their resistance zone and expecting some consolidation with downside movement. To understand more please refer to the next section where we are sharing the strategy.
I did some optimization in this strategy. Want to know how we are using it? You can enroll in our Option Strategies – A Mentorship Program.
Call Ratio Spread in ITC
Before we go to our Call Ratio Spread Strategy in ITC, I will tell you, Why I choose ITC for this strategy? To understand this, let’s look at the chart first.
After a good rally in ITC, We saw a sharp decline from the resistance zone. Around 260 – 265, there is a strong resistance zone that seems to be difficult to break at least for this expiry.
- It’s a simple setup, Whenever you saw a resiatnce zone that looks difficult to break, can initiate this strategy.
Now the next step is to check the option chain data. Based on the data you can select a resistance zone and based on that zone you can choose your strikes.
Option chain analysis of ITC
Based on the option chain data, you can see that 250 CE & 260 CE carries the highest Open interest and reacting as an immediate resistance zone for October expiry. So we can use it to choose our strike. Now. let’s look at the Call ratio spread strategy in ITC.
Call Ratio Spread Strategy in ITC
In the previous section, we have found that 250 – 260 is the strong resistance zone. So I choose 255 CE and 260 CE.
The reason is: I will not lose anything till ITC expire below 260. This is my break-even.
Now I have a question, I said, I will not lose anything till ITC expire below 260. But what will happen if we got any good upside movement in the next 2/3 days? How will you manage it?
Let me tell you the adjustments after the Call Ratio Spread in HCLTECH.
Call Ration Spread in HCLTECH
Now, look at the chart of HCLTECH to find the call Ration Spread strategy in it.
After a good rally in HCLTECH, we saw a sharp decline due to profit-booking and now HCLTECH is looking bearish without any sign of recovery. So a bearish stock trading near to its resistance zone is also a good candidate for a Call Ratio Spread Strategy.
Now Look at the Open Interest data of HCLTECH.
Option chain analysis of HCLTECH
Based on the option chain data, you can see that 1300 CE & 1400 CE carries the highest Open interest and reacting as an immediate resistance zone for October expiry. So we can use it to choose our strike. Now. let’s look at the Call ratio spread strategy in HCLTECH.
Call Ratio Spread Strategy in HCLTECH
In the previous section, we have found that 1300 – 1400 is the strong resistance zone. So I choose 1300 CE and 1320 CE.
The reason is: I will not lose anything till HCLTECH expire below 1300. This is my break-even.
Now I have a question, I said, I will not lose anything till HCLTECH expire below 1300. But what will happen if we got any good upside movement in the next 2/3 days? How will you manage it?
Let me chare the adjustments with you.
Possible adjustments for Call Ratio Spread Strategy
You can see, we have unlimited risk on the upside. So any upside movement will create some problems. TO manage this trade in such a situation, the first thing you can do is: Stop your unlimited loss first. To do that simply square off one sold call and convert it into a bull call spread.
After you square off one sold call, your Unlimited risk will convert into limited risk and limited profit.
There are some other adjustments too. To learn those adjustments you can enroll in our Option Strategies – A Mentorship program.
I hope my articles are helping to trade with these options strategies. Which strategy you are using to generate your paycheck? Do let me know in the comment box.
Options Strategies – A Mentorship Program
On the 1st of September 2019, We have launched a new mentorship program for Option strategies, in which we are discussing how can we deploy these strategies? What rules we should follow before taking a trade? and what should be our adjustments if the script is moving againt your direction?
DISCLAIMER: – we are not a SEBI research analyst. Views posted here only for educational purposes. There is no liability whatsoever for any loss arising from the use of this article or its contents. This product is not a recommendation to buy or sell, but rather a guideline to interpreting specified analysis methods. This information should only be used by investors and traders who are aware of the risk inherent in securities trading.