Call Ratio Vertical Spread

Components

Long one ITM call option and short two OTM call options.

Risk / Reward

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

Maximum Gain: Limited to the difference between the two strikes less the net premium paid.

Characteristics

When to use: When you are bearish on volatility and neutral on market direction.

Even though a Call Ratio Vertical Spread is the reverse of a Call Backspread, it is generally not referred to as being short a Call Backspread as a Call Ratio Spread requires up front payment and is hence a long strategy.

You will notice that it is very similar to a Short Strangle except the risk is limited on the downside.