Call Backspread 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). bearish: A trade is bearish if it would profit from a decrease in the underlying (e.g. stock or future) price. Likewise, a trade thesis is bearish if it is expecting the underlying to decrease. 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. calendar spread: A calendar spread is a horizontal option strategy which means that it is buying and selling option contracts that are on the same strike but different dates. 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. debit: In an option strategy, there is a debit paid from long options or debit spreads. This is the premium paid for the opportunity to hold the position. The debit also functions as the max loss of a long option position. The counterparty receives a credit as time decay income (theta) until the option expires but takes on risks which can lead to losses and be significant if from an open-ended position. diagonal spread: A spread that has both a vertical and a horizontal difference between strikes. As an example of a long put diagonal, a put could be bought 60 days out and then a put sold 30 days out at a lower strike. The horizontal aspect allows volatility to be traded from one month to another. And the vertical aspect allows a directional thesis to be combined with the strategy. edge: An edge in trading is a competitive advantage but not one that guarantees a profit. It can be any method, idea, or tool which helps to outperform randomness. One way to interpret an edge is that it has a positive expectancy, which means that it would prevail as net profitable after many (ideally hundreds or more) occurrences. A single losing trade can be a good trade the majority of the time and a single winning trade can be just lucky without an edge. The bottom line is that if you have edge in your trading then you have a positive expected value, where you should come out on top if your trading size is managed well enough that no single trade causes too much loss and allows for many attempts. 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. IV spike: A sharp increase in implied volatility which causes the price of an option to increase. Short options take losses from IV spikes and long options benefit. 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 (out-of-the-money): 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. 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). security: Any investment product that can be traded on an exchange, such as but not limited to stocks, futures, ETFs, options, bonds, mutual funds, and treasuries. 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. spot: The immediate delivery price of an underlying security. Shares are always considered the spot price, while options are a derivative of that. We also referred to index prices as spot—in contrast to futures or options on them. underlying: A reference to the immediate price of the underlying security. This is also sometimes called spot (the spot price of the underlying). The spot price is in contrast to derivatives which have option prices or [forward] futures prices. 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. volatility: When we say volatility in trading, we usually mean either implied volatility (IV) or realized volatility (RV). Volatility-sensitive trades have the extra dimension of not only needing to be right about price, but also needing to be right about how quickly price can move (or not move) compared to what the market is pricing in. In many ways, volatility means the speed of market movement; volatility traders will make bets on whether prices will move faster or slower than expected. The overlap between IV and RV is that they are based on one standard deviation moves (68.3% confidence). Also, the slang “vol” is usually considered a reference to IV, especially as “event vol”. For clarity, it is usually helpful to specify explicitly whether we mean IV or RV. Related articles What are Calendar Spreads? What is an Iron Condor? What is a Butterfly Spread? What is a Call Spread?