Ratio Spread
Buy 1 option and sell 2 or more of the same type at different strikes to maximise premium income.
Profit / Loss Diagram
Bull Ratio Call Spread at expiration
What is this strategy?
The Ratio Spread is an advanced strategy in which you buy one option and sell 2 or more options of the same type (both calls or both puts) at different strikes. The structure creates a maximum-gain zone between the strikes but exposes the trader to unlimited risk beyond the sold strike. It is appropriate only for experienced traders with strict risk management.
In a Bull Ratio Call Spread, for example, you buy 1 ATM call and sell 2 OTM calls. If price stops exactly at the sold strike, you gain the difference between strikes plus the net credit — not just the premium collected, which is the most common calculation error with this structure. If it rises well beyond that strike, the uncovered part of the ratio generates losses that accelerate without limit. Maximum profit is reached at expiration exactly at the strike of the sold calls.
The appeal of the Ratio Spread is the potentially large premium credit if you structure the ratio correctly. The risk, however, demands expert management: setting aggressive stops is critical. This strategy is typically used when you believe price will rise <em>to</em> a specific level and no further, and you want to maximise theta income. As a net option-selling structure it is particularly effective with implied volatility high, which is when the premium collected compensates the risk taken.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| BUY | 1 Call | ATM | 30-45 DTE | +1 AAPL Jul 175 Call |
| SELL | 2 Calls | OTM (2-3% above) | 30-45 DTE | -2 AAPL Jul 180 Call |
Example
Scenario: AAPL trading at $173. You expect a limited move higher over the coming weeks.
- Call Purchased +1 AAPL Jul 175 Call @ $4.00
- Calls Sold -2 AAPL Jul 180 Call @ $2.00 each
- Net Cost $0 (400 collected on the two calls − 400 paid for the one purchased)
- Maximum Gain $500 (strike difference 5.00 × 100, at the 180 strike at expiration)
- Maximum Loss Unlimited (if AAPL rises sharply)
- Upper Breakeven $185.00 (180 + 5.00) — above it, every dollar higher costs $100
- Lower Zone Below $175 all three options expire worthless: result $0
- Loss if AAPL = $195 −$1,000 (500 − 15.00 × 100) and growing with every dollar
The Greeks
Positive delta up to the short strike, then it turns negative. Delta peaks in the middle of the range.
Theta is strongly positive in the maximum-profit zone. You gain every day price stays in range.
A compression of implied volatility benefits the ratio spread, because it makes buying back the two sold calls cheaper. You want to open it with IV high and close it after the compression.
Gamma is positive between strikes and negative outside them. That is what creates the characteristic profit peak.
Position Management
- 01 Set a Severe Stop Loss Define a stop at 2-3 times your maximum gain. If your maximum gain is $500, close if you lose $1,000-1,500 to avoid catastrophic losses.
- 02 Monitor Price Constantly Especially near the short strike. If price approaches, increase monitoring. Close before it goes in the money to preserve gains.
- 03 Buy Protection if Needed If price gets dangerously close to the short strike, buy a higher call to cap the risk. It converts the spread into a finite structure.
- 04 Take Profits Early If you reach 50-75% of maximum gain before expiration, consider closing and repeating. Do not wait for expiration with undefined risk.
- 05 Adjust if Price Moves Against You If price falls significantly, the short calls lose value. Consider closing the whole spread rather than holding a dead position.