A call backspread is an options strategy which has a higher number of long calls than short calls. The most common form is a 2:1 long call vertical backspread, which buys two calls and then sells a call at a higher strike on the same date:

• Buy 2 calls near the money.
• Sell 1 call further out-of-the-money (at a higher strike and a lower delta).

<Long call backspread risk graph retrieved from OptionsPlay>

Intermediate: Strategy

A trader would use a 2:1 call backspread if extremely bullish, such as going for a short bounce off of the Put Wall as support. 

Unless specified as a calendar spread or diagonal spread, a call backspread is assumed to be a vertical spread. This effectively is a debit call vertical with an additional long call. 

What makes this strategy extremely bullish is that it has unlimited profit potential if the underlying shoots up far beyond what the options market is expecting (while keeping the downside risk limited). Time decay and max loss are stronger on 2:1 backspreads than normal debit vertical spreads, but the rewards of a common backspread are potentially much more explosive. This is a high-conviction trade. 

Advanced: The Call Ratio Backspread Variation

One variation of a call backspread is a call ratio backspread. This still meets the backspread definition that more options are bought than sold, however they are bought further out-of-the-money while one is written near the money. This strategy is not necessarily a debit or a credit, a difference which depends on the strike selection. It also has uncapped [left] tail risk since the underlying security can move indefinitely against the short option. 

Compared to a 2:1 call backspread, a call ratio backspread can be more attractive for index products since it would have a reliable skew edge, with the further out-of-the-money calls being bought at a lower IV% (implied volatility). Since there is an additional long call, this strategy is highly sensitive to movements in IV, and can explode in price considerably if there is an IV spike. This doubly-positive outcome tends to happen in one of the rarer situations where both the underlying and IV increase at the same time because call skew is expanding. 

The inverse type of setup with a common 2:1 put backspread is usually more popular since positive spot/volatility correlations are more likely, which delivers that double-benefit when being right about direction also means being right about IV expansion.

backspread: A type of ratio spread (uneven amount of long and short contracts) which has more long option contracts than short option contracts. A backspread has a stronger directional outlook than a simple debit vertical spread; it costs more and has more positive gamma (accelerating directional exposure) and vega (sensitivity to changes in implied volatility).

bullish: A trade is bullish if it would profit from an increase in the underlying (e.g. stock or future) price. Likewise, a trade thesis is bullish if it is expecting the underlying to increase.

credit: In an option strategy, there is a credit received from the time decay (theta) of short options or credit spreads. This is the premium which you receive and the counterparty pays for the opportunity to hold the position. The one receiving the credit gains income until the option expires but takes on risks which can lead to losses and be significant if from an open-ended position.

extrinsic value: Extrinsic value is the time premium of an option which disappears gradually as its contract approaches expiration. It is the price for optionality that option buyers are willing to pay for a chance at a stake in the unknown. As implied volatility increases, so does extrinsic value. Out-of-the-money options entirely consist of extrinsic value. 

intrinsic value: An option has intrinsic value if it is in-the-money, which means that if the option expired with the underlying security at its current price, then there would still be some value. Intrinsic value is only a matter of how much the strike price is beating the underlying price by. It has nothing to do with implied volatility.

IV (implied volatility): The expected percentage range over a year with 68.3% confidence. This is based on options pricing at one standard deviation. Long options benefit from increases in implied volatility and short options benefit from decreases in implied volatility. In general, when implied volatility increases it means that the expected percentage range is getting larger. When implied volatility is applied to lengths of time other than one year, then this is called the expected move.

long call: To be long (buy and hold) an option contract which has limited risk and unlimited potential gains from moves up in the underlying price. The max loss is the cost of the call. Going long on a call is a simple way to gain upside exposure to movement in an underlying security, however the underlying security (such as a stock) must outperform the premium placed on that call by the options market. In other words, a long call must beat the options market in order to profit. If closed early (well before expiration) then a long call must outpace the expected move (priced in by the options market) for a specific period of time. All long calls have long gamma and long vega but short theta. It is uncommon to exercise calls rather than simply close them for a profit, however a long call is frequently understood as a right to exercise (trade in the long call to be long 100 shares) if above the specified strike price. Synthetically, a long call becomes logically equivalent to a long put if also short 100 shares.

OTM: An option is out-of-the-money if it would have zero value expiring with the underlying at its current price. When an option is out-of-the-money, its entire price is made of extrinsic value, which is a premium that option buyers are willing to pay for an opportunity to make a profit.

pinned:  A pin is a thesis or a condition where prices tend to stick in a narrow range. A pinning condition is usually linked to high gamma levels in the market. The Absolute Gamma strike is a normal place for a pin to occur. The phenomenon of a pin is how a security is drawn to a specific price as it nears expiration. Technically, when approaching an expiry and when close to an option’s strike, the increase in market gamma creates dealer hedging activity which causes the stock to gravitate back to the pinned strike; dealer hedging is the rebalancing of market maker books to neutralize their risk.

Put Wall: The Put Wall is our major support level, which measures the most amount of negative gamma in the market. This shows us what the bottom of the probable trading range is (the lower bound). 

short call: To be short (sell to open and hold) a call. Unless otherwise hedged, the owner of the short call has unlimited risk and only limited potential gains, which makes this an extremely dangerous strategy in isolation. If left to expire, a short call will achieve max profit if the price ends up underneath the strike price. Shorting a call is a way to express a thesis that one is “not bullish” such as what might be justifiably the case if testing a Call Wall from underneath; being “not bullish” is different than being bearish. For a short call to be profitable, the underlying security must underperform the premium placed on that call by the options market. In other words, a short call profits when the underlying security fails to beat the options market. To be closed early for a profit, there needs to be a decrease in implied volatility or the underlying must have increased less than the options market has priced in for that specific period of time. All short calls have short gamma and short vega but long theta. Short options also come with obligations instead of rights, which means that, at any time, shares can be assigned (100 short shares for each contract); assignment usually only happens when in-the-money and near expiration). Synthetically, a short call becomes logically equivalent to a short put if the trader is also long 100 shares.

skew: Volatility skew is the difference between implied volatility amounts of different options strikes on the same date. Implied volatility is the expected percentage range over one year–based on option prices–with 68.3% confidence. Skew is one of the main edges to look for in an options trade, especially on vertical spreads (all options are on the same date). Sometimes it is a penalty dragging down a good trade, but it is nonetheless important to understand the extent of how much it can challenge a trade if knowingly accepting to take the opposite side of a skew advantage.

strike: The price that an option is based on. A long call will expire worthless if the price of the underlying security finishes underneath the strike price, and a long put will expire worthless if the underlying finishes above the strike price.

vertical spread: Any option strategy which has all contracts expiring on the same date. In contrast to a horizontal spread (calendar) or diagonal spread (combination of vertical and horizontal strikes), vertical spreads are usually the most directional and also the easiest to manage. With vertical strategies, the main edge at play is usually skew (differences in implied volatility for different strikes on the same date). Implied volatility is the expected percentage range over the next year—based on option prices—with 68.3% confidence.