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Back Spread with Calls

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1Back Spread with Calls Empty Re: Back Spread with Calls Sun Apr 23, 2017 10:02 pm



As I take it, in this case one can get a pretty good income, but is the loss limited?

2Back Spread with Calls Empty Back Spread with Calls Thu Jul 30, 2015 9:10 pm



A Back Spread with Calls strategy can be extremely profitable when trading a bullish and highly volatile currency pair. Essentially the trader sells an at-the-money (ATM) Call to cover the expenses of the more expensive out-of-the-money (OTM) Call. The trader expects the pair to be bullish for a maximum profit and at the same time cuts his losses if the pair is bearish with a small profit from the sale of the at-the-money (ATM) Call. The trader only makes a loss if the pair is not as bullish as he expected it to be.
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When to do it
This strategy works best when the trader thinks that the pair is bullish with high volatility.

The set-up

  • Sell an ATM Call at strike price A (spot +0)
  • Buy an OTM Call at double the amount of A at strike price B (spot +)
  • At the time of creating this strategy, the pair’s price will be at A.

Maximum potential profit
The maximum potential profit is unlimited.

Maximum potential loss
The maximum potential loss is limited to the difference between B and A minus the premium received.

Time impact
In the Back Spread with Calls strategy, time decay will inflict the greatest loss if the pair’s price is at B. If the pair’s price is at or below A, then time decay works in favour of the trader in order for both options to expire worthless and the trader will profit from the premium received.

Best/worst case scenario
The best case scenario occurs when the pair’s price increases by a big margin. Profits keep rising as the pair’s price increases. The worst case scenario occurs when the pair’s price does not increase as much as expected and the trader suffers the greatest loss at B.

By increasing the price of the Call purchase, maximum profit is increased. The point where the premium received is close to 0 is where the trader can earn a big profit and at the same time not suffer a loss if the pair ends up being bearish. Any occasion where the trader is required to pay a premium instead of receiving a premium would mean higher profits if the pair is bullish but losses if the pair is either bearish or not as bullish as expected.

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