Strategies · Library · Options
§2.38Hedges and structures
Ratio call spread
Buy one call below the market and sell two or three calls nearer the market, collecting a net credit if possible. It earns from a flat to gently softer market and carries open-ended loss on a big rally.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Neutral to mildly bearish; expects the price to stay below the short strike without a large surge.
- Entry and exit
- Buy one lower-strike in-the-money call and sell two higher-strike calls, same expiry, ideally for a credit. Hold to expiry or close early on a rally.
- Sizing
- More short calls than long calls, typically 2 to 1 or 3 to 2
How it fails
- Loss is unlimited if the price rallies far above the short strikes, since extra calls are uncovered
- Best result is at the short strike; the credit is the only gain if the price falls
- Time decay helps the seller, but a sudden rally can turn a small profit into a large loss
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 stays flat or falls modestly, while accepting rally risk, matches this view; paper only, with rally risk stated.
Needs options and short positions, which a long-only builder lacks.
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.38, p. 32 of the SSRN version. Described in our words. Hedges and structures is ARCANE’s filing, not the book’s.