A variant on call ratio backspread which involves selling a number of lower strike call options and buying a larger number of higher strike call options. A call ratio backspread is said to be “bearish” in markets which are usually skewed towards forward volatility. In such markets, investors expect sharp declines in price, coupled with increasing volatility.
The number of lower strike calls should always be higher than the number of higher strike calls. For example, an investor may sell two calls with $50 strikes and buy three calls with $60 strikes. This means, he combines two short calls (at $50 strikes) and three long calls (at $60 strikes).
Comments