Time-Bound Call Back Ratio Spread for Breakouts

The reward to risk ratio of a call option is always higher than that of a futures buy, but for a variety of reasons, the buy call’s success ratio is always lower.

For the majority of directional traders, consolidation results in disappointment. Particularly over the period of three to four days, there are not many trading chances. This increases our desire to trade as soon as we see the indices moving outside of the range in which they have been trading.

The issue with this trade is that it can take a long time for such a possible breakthrough to occur. Before the escape may occur, there can be several attempts. Let us examine how to handle these possible breakouts.

Changing the behavioral elements of trading is a non-trading strategy that every trader has to have.

1. Small Commitments: The theory here is that the attempted breakout may not work out, and it could continue to fail until we witness a breakthrough. We must make sure the bets are lower than normal so that the same capital and loss provision can earn us more trading efforts and prevent us from running out of money until the very final try.

2. High Reward to Risk transactions: In these markets, the selection of transactions is very important. This is because in order to account for more failures than typical, one must adapt less capital to greater profits.

Yes, we all prefer to trade only in high-reward, high-risk situations. However, this is about selecting the same approach. Always keep in mind that transactions with such a high reward to risk ratio will always have a compromised success percentage.

For instance, a call option will always have a higher return to risk ratio than a futures buy, but for a variety of reasons, the buy call’s success ratio will always be lower.

Now that we have cleared this out, let us go on to the approach that performs best in this kind of possible breakout situation.

Such a market has the potential to blow up if the range is breached in a sustainable way. It may, however, reverse course and provide a little hit that forces the stocks and indexes back within the range.

Because of the blow back into the range, which might force us out of business after two to three unsuccessful efforts, traditional strategies like buy future will not work here.

Additionally, buy-call-put strategies will not work as well. The time factor, which might take two to four days, is the reason of this. Additionally, a large throw back into the range might eliminate the option entirely.

The best-suited approach might be a time-bound back ratio spread of two to three days.

A Call Back Ratio Spread Example for a Bullish Breakout

We purchased two calls with a higher strike and sold one batch of lower strike calls when the stock was at 1400.

After two days, the gray line indicates the payoff. It is interesting to see that the risk is around 2500 regardless of how severely the stock drops, yet even a 4% decline yields a payoff that is 4X+ the same.

This works if the expiration date is more than ten days away, therefore in the last days before the expiration date, go for the next one.

Leave a Comment