Investors must use “Call Backspread” strategy when they are bullish on market direction as well as volatility.
It works well if the investor is bullish as well as bearish on the market with a bias to the upside.
This strategy involves selling an “In-the-Money Call Option” and buying two lots of “Out-of-the-Money Call Option”. Both Call Options must have the same underlying security and expiration month.
“Call Backspread” is similar to Long Straddle except the payoff flattens out on the downside. Investor makes profit when prices fall, although the gains are greater if the market rallies.
Investor view: Bullish on direction as well as volatility of the Stock/ Index.
Risk: Limited to difference between the two Strikes -/+ net premium paid/ received.
Reward: Unlimited on upside and limited on downside.
Breakeven: Strike price of Long Call + Strike price of Long Call – Strike price of Short Call+/-net premiumpaid/ received. In case of net inflow of premium there is one more breakeven point which is calculated as (Strike price of Short Call + net premium received).