Options Trading Strategies: Bullish - Call Backspread

Explanation

This strategy is adopted by trader who is bullish in nature. He expects market and volatility to rise in the near future. A trader need not be direction specific here (i.e. an upward or downward trend, but a small bias towards an uptrend should always be present, as the gains will be much higher once the market moves up rather than market moving down and keeping premium as income. This strategy involves buying of 2 OTM Call Options and selling 1 ITM Call Option.

Risk: Limited

Reward: Unlimited

Construction

Sell 1 ITM Call Option
Buy 2 OTM Call Options

Example

Suppose NIFTY is trading around 5200 levels, Mr. X is bullish on the market and the volatility. He will apply Call Backspread Strategy. He will sell one 5100 NIFTY ITM Call Option for a premium of Rs. 165 & buys two 5300 NIFTY OTM Call Options at a premium of Rs. 50 each. His net investment will be Rs. 3250. [{165-(50*2)}*50]

Case 1: At expiry if NIFTY closes at 5500, then Mr. X will make a profit of Rs. 3250. [{((200-50)*2) + (400-165)}*50]

Case 2: At expiry if NIFTY closes at 4900, then Mr. X will keep the premium amount received from sale of 5100 NIFTY ITM Call Option. His net gain will be Rs. 3250. [{165-(50*2)}*50]

Case 3: At expiry if NIFTY closes at 5250, then Mr. X will make a loss of Rs. 4250. [{(150-165)-(50*2)}*50]

Payoff Chart