Question

A call option with strike price of $100 sells for $3 whereas a call option with strike price of $106 sells for $1. A ratio spread is a portfolio with the following characteristics: long on one call with Strike K1, shirt on 2 calls with Strike K2 (where K2>K1), Thsm, you create a ratio spread by buying one call option with the strike price of $100 and writing two call options with the strike price of $106. 1) perform a what if analysis for this ratio spread (what is the net profit if the stock price ends at 0,50 100, 103, 106, 120 and 1000?) What is the most you could lose in this strategy? What is the most you could make? What are the breakeven stock prices? make a graph showing net profit versus stock price expiration.

Answer 1

Here ratio spread is portfolio of 1 long call option with strike price of $100 (call price $3) and 2 short call option with strike price $106 (call price $1)

What if analysis for ratio spread at the following stock prices:

Breakeven stock price price = $101

Most you could loose in this strategy: -$889

Maximum you can make in this strategy = $5

Stock price	1 Long call option Payoff at strike price $100	2 short call option payoff at strike price $106	Net payoff on the ratio spread
0	-3	2	-1
50	-3	2	-1
100	-3	2	-1
103	0	2	2
106	3	2	5
120	17	-26	-9
1000	897	-1786	-889
Breakeven stock price
101	-2	2	0

Excel formula:

Stock price	1 Long call option Payoff at strike price $100	2 short call option payoff at strike price $106	Net payoff on the ratio spread
0	=MAX(A2-100,0)-3	=-2*MAX(A2-106,0)+2*1	=B2+C2
50	=MAX(A3-100,0)-3	=-2*MAX(A3-106,0)+2*1	=B3+C3
100	=MAX(A4-100,0)-3	=-2*MAX(A4-106,0)+2*1	=B4+C4
103	=MAX(A5-100,0)-3	=-2*MAX(A5-106,0)+2*1	=B5+C5
106	=MAX(A6-100,0)-3	=-2*MAX(A6-106,0)+2*1	=B6+C6
120	=MAX(A7-100,0)-3	=-2*MAX(A7-106,0)+2*1	=B7+C7
1000	=MAX(A8-100,0)-3	=-2*MAX(A8-106,0)+2*1	=B8+C8
Breakeven stock price
101	=MAX(A11-100,0)-3	=-2*MAX(A11-106,0)+2*1	=B11+C11