The Short Call Ratio Is Actually a Slightly Bullish Trade

A short call ratio is usually categorized as a "bearish" trade because the ugly outcome is a runaway rally.

But we believe that's the wrong way to label it because you make more money if the stock moves up, it just can't go up an unlimited amount.

The structure

A short call ratio buys one call and sells two calls at a higher strike. It is typically opened for a net credit, and it carries theoretically unlimited risk if the stock keeps going up, because you are net short calls.

Unlimited upside risk is real. But that doesn't mean you have a bearish view when opening the trade.

Example Trade

Stock at $100.

• Buy one $105 call for $4.00
• Sell two $115 calls for $2.10 each

Net credit: $0.20, or $20 on a one-lot.

If the stock closes at or below $105, every option expires worthless and you keep the credit. Nothing more. A sell-off does not create extra profit; it just lets you keep what you already collected.

The peak is at $115, 15 points above the current price. The trade makes $1,020 there. That is 51 times the $20 it keeps on a decline.

A position that pays many times more on a measured rally than on a drop is not a bet that the stock will fall.

What "slightly bullish" means here

You're fine with the stock going up 15% from here. In fact, maximum profit is at a 15% up move and losses only start at a 25% up move.

If it falls, you only keep the small credit and that's not much in most cases. If it rises to the short strike, you make several times that credit. The trade is bullish. It just has a stop built into the upside.