A ratio call spread added to a losing stock position that doubles the recovery rate up to a target price, paid for by capping gains there.
When a stock has fallen and you do not want to add capital, a one-by-two call spread above the market can halve the distance back to break-even. Buy one call near the current price and sell two further out for roughly no cost; between the strikes the position gains at twice the rate of the shares alone.
It is not magic. Above the short strike you have effectively agreed to sell, and if the stock collapses further the calls are worthless and you still own the loss. It repairs a moderate recovery, nothing else.
Example: you own 100 XYZ at $60, now trading at $50. Buy one $50 call at $2.30 and sell two $55 calls at $0.80 each for a $0.70 debit. At $55 the shares are down $500 and the spread is worth $430, so the net loss is $70 — and it stays $70 at every price above $55, because the extra short call offsets the shares from there up.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
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