Call Backspread

Note: A Backspread is also called a Ratio Spread.

Components

Short one ITM call option and long two OTM call options.

Risk / Reward

Maximum Loss: Limited to the net premium.

Maximum Gain: Unlimited on the upside and limited on the downside.

Characteristics

Similar to a Short Straddle except the loss on the downside is limited.

When to use: When you are bullish on volatility and bullish on market price. Note though, that you profit when prices fall, although the gains are greater if the market rallies.

A Backspread looks a lot like a Long Straddle except the payoff flattens out on the downside. The other key difference is that Backspreads are usually done at a credit. That is, the net difference for both legs means that you receive money into your account up front instead of paying (debit) for the spread.

Even though the payoff looks like a "long" type position, it is often referred to as a "short" strategy. Generally it is like this: if you receive money for the position up front it is called a "Short" position and when you pay for a position it is called being "Long".