Hello again everyone, I’ll be brief, try your best to avoid the temptations of this world. They aren’t worth the cost. Trust God’s plan and keep moving forward accordingly.
With that, I don’t know what to make of 2025 at this point. Depending on where you look the story is dramatically different. In a post from Vanguard titled, “Investor Pulse: Both optimism and uncertainty about 2025” head of investor behavior for Vanguard explained it this way:
“Investors remain cautiously optimistic about the stock market and economy heading into 2025”
Which I think sums up exactly how I feel about the state of our current market. Perhaps I’ve always felt this way but for some reason It’s really weighing on me to start this year. Possibly, some part of me just wants the market to trade lower for a period so I can buy cheaper shares. Maybe I just can’t rationalize the current valuations, I’m not exactly sure. What I am sure of is, I’m not sure what to make of the market right now!
Therefore, in today’s post I want to discuss an options strategy that I don’t trade very often. The Call Ratio Back Spread. And I’m wondering if it isn’t the perfect options play for 2025? So, let’s jump in and consider this strategies possibilities.
Post Agenda
- Call Ratio Back Spread Overview
- Call Ratio Back Spread Construction
- Example Call Ratio Back Spread
- 2024 Back Test Results

Call Ratio Back Spread Overview
The call ratio back spread is used when a trader is bearish but wants to avoid upward surprises. If price rises quickly then losses from the bearish call spread would be erased by the further OTM long call. Essentially, the strategy combines the credit or income potential of a bear call spread with the benefits of a long call. Limiting losses to the upside while still collecting a respectable credit on the position.
Call Ratio Back Spread Construction
Now, as it is with any options strategy, the call ratio back spread can be set up in whatever way the trader prefers. In this instance, I’m bearish on the market but not ruling out a significant advance. Therefore, for this example, I’ll construct a position relatively close to the money with a further out of the money long call. However, depending on how bearish or bullish the trader may be, the spread could be initiated up or down the options chain. With more or less width and at different expirations.
Here is the basic construction for a call ratio back spread.

This is my basic call ratio back spread set up. Typically however, the additional long call is traded at the same strike as the bear call spread long and on the same expiration. I just prefer to enter the position for a credit where as traditionally the trade is initiated at a debit. My thoughts are, if I’m outright bullish on the market why not skip the complexity of the spread all together. Each trader will have to determine how they feel when setting up the strategy themselves.
Example Call Ratio Back Spread
To keep things simple, I’ll highlight the strategy using the SPY ETF. I like the liquidity of the big ETF’s so I use them more than not these days. In any case, my market thesis is that a rise could come but I’m mostly bearish. To take advantage of that thought process I’m using the call ratio back spread. I’ll capitalize on a strong rise in the market but receive the credit if the market stays flat or falls.
In this example, I’ve set the trade up as two separate trades for easier viewing. To enter the trade however, I’d set it up entirely as one. Moreover, take notice I’ve utilized a shorter dated long call option. This “cheaper” call option will expire before the bearish call spread but should price decline as expected much of the premium should be captured. If price rises between now and March 7th I’ll enjoy any upside to that long call. Admittedly, it may be more ideal to set this trade up further out in time.

A few things to highlight as you look over that P/L diagram. The total credit is $64 dollars which isn’t clear given how I set it up for viewing. Should price stay below the $633 short call I’ll get to keep that credit. The probability of that happening is about 62% at entry. Hopefully, prior to the long call expiring enough credit is captured to retain a profit or price has fallen enough to no longer need the long’s protection.
Note About Volatility
The last unique attribute to this position I want to point out is with regard to vega. Below the short call strike a volatility rise means I extract premium faster. If volatility rises prior to the long call’s expiration I’ll enjoy the benefit of a dramatic price increase. To illustrate that point, below is an image of the vol step on ThinkorSwim. Essentially showing what would happen to the spread at varying volatility levels.

2024 Back Test Results


Final Thoughts
As I close for today, take notice that I’ve opted to trade this strategy using an earlier expiring long call. This protective long call could easily lose all of it’s value very quickly and just leave me holding a short call spread. The bear call spread alone has not performed well in the past so that wouldn’t be the preferred approach. If that becomes a concern I may have to use any remaining credit from the spread to purchase an adjustment call in the bear call expiration. Still, this wouldn’t be overly concerning because by then there would only be 14 days remaining. I could probably buy the call at that time for less than $10 and still retain an overall credit with much of the same protection.
Additionally, you may notice from the back test results I wasn’t able to initiate the position at differing expirations as I’ve described here. Every time I tried the data was wildly skewed. Thus, I just opted to initiate the bear call back spread within the same month which most would do anyway. In total across 2024 the spread achieved $508 in profit for a return on capital of 84%. Although, after reviewing the data from the back test I actually think the performance was even better than shown. For some reason, TastyTrade kept 2 of the spreads credits in “cents” rather than multiplying by 100 as options always are. Unless I’m missing something that would improve the win rate to over 90%.
In final, I think this trade fits my “feeling” for 2025 at this point. Trump is back in as the President which I think the market likes but the data elsewhere seems ripe for a decline. If the market falls I’ll at least be earning an income. If it continues to make large upward moves I’ll have the bonus of cheap long calls for stellar percentage gains. I guess time will tell how it works out.
Until the next post.
God bless,
Jeff