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A reverse call ratio spread (call backspread) on BCE Inc. (BCE)

Martin Noël
January 16, 2017
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3 minutes read
A reverse call ratio spread (call backspread) on BCE Inc. (BCE)

As you can see in the following graph, shares in BCE Inc. (BCE) have been trading in a range of $57 to $59 since mid-November, with points of momentum suggesting a slightly bullish trend.

 

Daily Graph of BCE ($58.19 on Friday, January 13, 2017)

2017-01-16-bce

We can also see that the stochastic oscillator (the lower indicator) has begun to trend upward, while the RSI indicator (above) is on a bullish trend. If BCE maintains this upward momentum, it may approach $63 by May 2017.

 

To make the most of this scenario, we will implement a strategy designed to turn a profit if BCE closes at a price of $63 or better upon expiration on May 19, 2017. However, since nothing is guaranteed and the price of BCE could fall, the selected strategy will also allow us to benefit if the price drops to below $56, should this occur.

 

Reverse Call Ratio Spread

 

The strategy is called a reverse call ratio spread (or a call backspread). It consists of writing a call option with a strike of X and buying two or more calls with a strike of Y, where Y is greater than X.

 

Position

 

  • Sell 10 call options, BCE 170319 C 56, at $2.60
    • Credit of $2,600
  • Buy 20 put options, BCE 170319 C 59, at $1.08
    • Debit of $2,160
  • Total credit of $440

 

Profit and Loss Profile

As you can see in the above graph, we are well positioned to profit if the price of BCE rises above the higher breakeven price of $61.56 or if it drops below the lower breakeven price of $56.44, with a maximum profit of $440 below the $56 strike.

However, we will incur a loss if the price of BCE stays between these two breakeven prices. This loss could be as much as $2,560 if BCE closes exactly at the $59 strike price upon expiration on May 19, 2017.

Consequently, since we do not want to risk incurring the maximum loss, we will close the position in two months if BCE is still trading somewhere between the two breakeven prices.

We are also considering locking in a profit if BCE reaches a price of $63 or more.

 

 

Good luck with your trading, and have a good week!

 

The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.

 

Martin Noël
Martin Noël http://lesoptions.com/

President

Monetis Financial Corporation

Martin Noël earned an MBA in Financial Services from UQÀM in 2003. That same year, he was awarded the Fellow of the Institute of Canadian Bankers and a Silver Medal for his remarkable efforts in the Professional Banking Program. Martin began his career in the derivatives field in 1983 as an options market maker for options, on the floor at the Montréal Exchange and for various brokerage firms. He later worked as an options specialist and then went on to become an independent trader. In 1996, Mr. Noël joined the Montréal Exchange as the options market manager, a role that saw him contributing to the development of the Canadian options market. In 2001, he helped found the Montréal Exchange’s Derivatives Institute, where he acted as an educational advisor. Since 2005, Martin has been an instructor at UQÀM, teaching a graduate course on derivatives. Since May 2009, he has dedicated himself full-time to his position as the president of CORPORATION FINANCIÈRE MONÉTIS, a professional trading and financial communications firm. Martin regularly assists with issues related to options at the Montréal Exchange.

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