How you should convert call spread into ratio spread
This strategy would help reduce losses, if not generate profits, on your initial position
Last week, we discussed how to reduce losses on a long call by converting the position to a bull call spread. But what if your initial position is a bull call spread? This week, we look at how converting a call spread to a ratio spread or to a lower strike call spread can help you reduce losses, if not generate profits, on your initial position.
Conversion ratio spread
Suppose you expect an underlying to find resistance at 14760. You set up a bull call spread by going long on a 14700 call and shorting the 14800 call on the same underlying for the same maturity. With the underlying currently trading at 14653, the spread can be set up for a net debit of 51 points (166 less 115).