Page 99 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Derivatives & Risk Management

Notes 7. Call Ratio Vertical Spread: This is formed by long one ITM call option and short two OTM
call option.
Even though a Call Ratio Vertical Spread is the reverse of a Call Backspread, it is generally
not referred to as being short a Call Backspread as a Call Ratio Spread requires up front
payment and is hence a long strategy. We will notice that it is very similar to a Short
Strangle, except that the risk is limited on the downside.
Maximum Loss: Unlimited on the upside and limited on the downside.
Maximum Gain: Limited to the premium received.

When to use: When we are bearish on volatility and neutral on market direction.
Figure 7.19: Profit/Loss at Expiration for Call Ratio Vertical Spread

8. Put Ratio Vertical Spread: This is formed by short two OTM put options and long one ITM
put option.
Maximum Loss: Unlimited on the downside and limited to the net premium paid on the
upside.

Maximum Gain: The difference between the two strike prices less the premium paid for the
position.
When to use: When we are neutral on market direction and bearish on volatility.

Figure 7.20: Profit/Loss at Expiration for Put Ratio Vertical Spread

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