# Call Ratio Backspread Profit & Loss Graph

2. Bull Call Ratio Backspread Profit, Loss, & Breakeven

The following is the profit/loss graph at expiration for the Bull Call Ratio Backspread in the example given on the previous page.

## Break-even

The breakeven point for the bull call ratio backspread is given next:

• Breakeven Stock Price1 = Sold Call Option Strike Price + Net Premium Sold (Cost of Options Sold - Cost of Options Purchased). Note: This breakeven might not exist with every bull call ratio backspread a trader trades (i.e. if there is net premium purchased rather than sold).
• Breakeven Stock Price2 = Sold Call Option Strike Price + 2 x Distance between strike prices of the call sold and the calls purchased - Net Premium Sold or + Net Premium Purchased.

To illustrate, the trader sold the \$50.00 strike price call option for \$1.53, and also bought two options at the \$52.50 strike price for \$0.60 each, for a net premium sold of \$0.33 (\$1.53 - \$1.20). The strike price sold was the \$50.00. Therefore, \$50.00 + \$0.33 = \$50.33. The trader will breakeven, excluding commissions/slippage, if the stock is below \$50.33 by expiration.

For the second breakeven, the distance between the two strike prices is \$2.50 (\$52.50 - \$50.00). Consequently, 2 times \$2.50 is \$5.00. The net premium sold was \$0.33. The sold call option strike price is \$50.00. Summing everything together, \$50.00 + \$5.00 - \$0.33 = \$54.67. As such, the two breakeven points are \$50.33 and \$54.67.

## Profit

The profit for a bull call ratio backspread is as follows:

• Bull Call Ratio Backspread Profit = Stock price at expiration - Breakeven price

To continue the example, if the stock price at expiration is \$56.00, then the profit would be \$133 [(\$56.00 - \$54.67) x 100 shares/contract].

To the downside, the max profit is \$33 anywhere below the strike price of the option sold. This profit area to the downside might not exist for all bull call ratio backspreads.

## Partial Loss

A partial loss occurs between the call strike price sold and the call strike price purchased. A partial loss also occurs between the point of max loss and the upper breakeven. The calculation is given next:

• Bull Call Ratio Backspread Partial Loss1 = (Stock Price at Expiration - Strike Price of Option Sold) - Net Premium Sold or + Net Premium Purchased

For example, if the stock price was \$52.00 at expiration and the strike price of the option sold is \$50.00 and net premium sold was \$0.33, then [(\$52.00 - \$50.00) - \$0.33] x 100 shares/contract = \$167 loss.

• Bull Call Ratio Backspread Partial Loss2 = (Upside Breakeven Stock Price - Stock Price at Expiration)

To illustrate, if the stock price at expiration was \$54.00 and the upside breakeven stock price was \$54.67, then [(\$54.67 - \$54.00) x 100 shares/contract] = \$67.

## Max Loss

As stated previously, the max loss occurs at the strike price of the calls purchased. The formula is as follows:

• Bull Call Ratio Backspread Max Loss = (Strike price of calls purchased - Strike price of call sold) + Net Premium Purchased or - Net Premium Sold.

As an example, the strike price of the calls purchased is \$52.50, the strike price of the call sold is \$50.00, and the net premium sold is \$0.33: (\$52.50 - \$50.00) - \$0.33 = \$2.17 x 100 shares/contract = \$217.