Call Back Spread
A Call Back Spread can be used by bullish investors who anticipate a move in a volatile stock.
Call Back Spreads have limited risk and unlimited rewards.
How it works: The investor is in a bullish position. You A) sell a call (or calls) at a lower
strike price and B) buy a greater number of calls at a higher strike price.
Example: The stock is currently trading at $22.50. To enter into a call back spread, you would
A) sell two $22.50 calls for a $4.50 credit ($9 total) and B) buy three $25 calls @ $2.50 each
($7.50 total). This position would net a credit of $1.50 or $150 per contract.
If the stock dropped below $22.50, you would keep the $150. If the stock moves up to $28.50,
you would break even. If it goes dramatically higher, the profit is greater. If it goes to $35,
for example, the profit is $650 per contract.
The payoff: You can make big money if the stock takes a sharp rise.
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