Title:
Analysis of the Effectiveness of the Call Ratio Backspread Strategy Using Vanilla and Cap Options on Stock Price Movement Risk

Authors:
Donny Citra Lesmana*, Baiq Nabilla Yuliani Putri, Kanaya Ratna Duhita, Alifia Ananda Purwanto, Marcellino Philipus Pitoy, Nadia Salsabilla Khairunnisa, Indonesia

Abstract:

Stock price volatility exposes short sellers to potentially unlimited losses, making effective hedging strategies essential for risk management. This study compares the performance of Vanilla Call Ratio Backspread and Capped Call Ratio Backspread stratefies in hedging short stock positions. The analysis utilizes Advanced Micro Devices (AMD) and Johnson & Johnson (JNJ) as representatives of high and low volatility stocks, respectively. Option premiums are determined using the Black-Scholes-Merton framework, while future stock price movements are simulated using Geometric Brownian Motion model through Monte Carlo simulation. The efffectiveness of each stratefy is evaluated based on expected return, portofolio volatility, probability of loss, and Value at Risk. The empirical results reveal that capped call options significantly reduce premium costs compared with vanilla call options. Moreover, the capped call ratio backspread strategy outperforms both the vanilla call ratio backspread and the unhedged position by generating higher expected profits and lower risk measures across both volatility scenarios. These results indicate that the cost savings associated with capped options outweigh the disadvantages of their limited payoff structure. Consequently, the capped call ratio backspread strategy represents a practical and efficient alternative for investors seeking to hedge stock price movement risk while minimizing hedging costs.

DOI: https://doi.org/10.51505/IJEBMR.2026.10623