← Strategy LabLesson 42 · 4:06
Call backspread
Summary
A call backspread suits a view that XYZ makes a big rise. You collect $29 to open, keep it if XYZ falls or stays flat, and make more without limit above $109.71; the worst case is a $471 loss if XYZ ends right at $105. You break even at $100.29 and $109.71.
Key terms
- call backspread
- Sell one call and buy two calls at a higher strike, here collecting a small credit: a bet on a big rise with a valley at the higher strike.
- net credit
- When a pair of trades brings cash in overall.
- valley
- The dip in a backspread's last-day line, deepest at the bought strike, where a small move loses the most.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
Check yourself
Answer each question to see why the right answer is right.
1. How does the lesson's call backspread open?
2. XYZ rises a little and ends exactly at $105. What is your result?
3. XYZ jumps and ends at $115. What is your result?
4. Is any call in the lesson's call backspread uncovered?
5. XYZ jumps to $105 right away and then sits there. What happens as the days pass?
Finished the video and the quiz? .