Ratio spread
Buy one option, sell more than one at a different strike (or vice versa). Standard ratios collect credit with unlimited risk; back-spreads pay debit for unlimited reward.
How a ratio spread works
A ratio spread buys one option and sells more than one further out of the money, most commonly one long and two short. Because you sell two premiums against one, the position often opens for a small debit or even a credit — and that apparent free lunch is exactly where the danger lies.
Only one of the two short options is covered by the long. The second is naked. Below the short strike the position behaves like a normal vertical spread with defined risk; above it, that uncovered short call means losses grow without limit, and they grow faster than the profit did on the way up.
Maximum profit sits at the short strike, where the long leg is fully in the money and both shorts expire worthless. Past that point the extra short call turns the position around and it gives the profit back point by point until it crosses into loss.
A worked example
XYZ trades at $100 and you expect a move toward $110 but not much beyond. You buy one $100 call for $4.00 per share and sell two $110 calls for $1.50 each, all expiring in 45 days.
The trade that pays $900 at $110 loses $2,100 at $140. Being right about direction and wrong about magnitude is the specific way this position hurts, and it is a common way to be wrong.
When a ratio spread fits — and when it doesn't
- You expect a move to a specific level and genuinely believe it stalls there.
- Implied volatility is elevated at the strikes you are selling, making the ratio worth its risk.
- You have the permissions and margin for an undefined-risk position and a plan to close if it runs.
- The underlying can gap or trend hard. This is the structure most punished by a move that keeps going.
- You are attracted by the low debit or the net credit. That pricing is compensation for an uncovered short, not an edge.
- A takeover, earnings, or any binary catalyst falls inside the expiry.
Common questions
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