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Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Strip
Strap
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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Long Call Ratio Spread

Risk: limited
Reward: unlimited

General Description
Entering a long call ratio spread entails selling a lower strike call and buying twice as many higher strike calls (same expiration month). This is the same as a call backspread except the ratio of long calls to short calls is locked at 2:1.

(draw a long call ratio spread risk diagram here)

The Thinking
You're bullish and believe a stock has big upside potential. But instead using a long call strategy, which has a high cost of entry, you use a long call ratio spread, which has a much lower initial cost (possibly a net credit) but still has unlimited profit potential. Essentially you are using the proceeds from the short call leg to pay for the long call leg. If you're wrong and the stock drops, you won't lose much, if anything, because as an added bonus, depending on how the trade is constructed, you may be able to initiate the trade for a net credit.

Example
XYZ is at $43, and you believe it has big upside potential - so big that you are willing to roll the dice with out-of-the-money long calls - but you'd like to lessen the loss incurred should the stock drop. You buy (2) 45 calls for $1.25 each and sell (1) 40 call for $3.50. This trade is entered for a net credit of $1.00 (you collected $3.50 for the short call and paid $1.25 for each of the long calls).

Below $40, all calls expire worthless, and your gain is the net credit received when the trade was initiated.

At $45, your max loss occurs. You lose money on the long calls (you bought them for $1.25, now they're worthless) and the short call (you sold it for $3.50, now it's worth $5.00). So the total loss is $4.00.

Above $45, the profit from one of your long calls will be canceled out by the loss from the short call, but you'll make money point-for-point with the other long call (once the stock is above breakeven).

Compared to a long call, a long call ratio spread gives you some down protection (in this example you turned a profit when the stock dropped), but your upside is reduced, your breakeven level is less favorable and your loss, should the stock not experience a big move, is greater.

The PL chart below graphically shows where this trade will be profitable and at a loss.