Strategies · Library · Options
§2.36Volatility
Call ratio backspread
Sell a smaller number of calls near the money and buy a larger number of calls further out of the money (often two bought for one sold). It profits from a sharp rally and may cost little or even pay a credit.
Open in the builderAs a long-only proxy; see how ARCANE uses it.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Builds as a long-only proxy
The rule
- Signal
- Strongly bullish with expectation of a big, fast rise; rising volatility helps, and a quiet drift is the worst case.
- Entry and exit
- Sell, say, one call near the money and buy two calls at a higher strike, same expiry. Hold to expiry, or close early after a sharp rally or when the view is wrong.
- Sizing
- Long calls outnumber short calls, typically 2 to 1 or 3 to 2
How it fails
- The worst loss sits in the zone where the price ends near the higher strike, where the short call has lost value but the long calls are still worthless
- If the price falls the loss is small, and a net credit can even leave a small gain; stagnation just below the long strike hurts
- Upside is unlimited since more calls are owned than sold; the short calls cost money until the rally outruns them
Data it needs
- options chain with strikes and premiums
- implied volatility
- underlying daily price
ARCANE has the underlying daily close but no options chains or implied volatilities
How ARCANE uses it
A Call that an asset breaks sharply higher by a date (strong upside, not just any rise) matches this view; paper only.
Builds as a long-only proxy. Holding the underlying captures the big-rally part but not the cheap protection or the dead zone.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.36, p. 31 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.