Ratio Spread
A ratio spread is an options position where a trader buys a certain number of options at one strike and sells a larger number of options at a different strike, all on the same underlying stock and with the same expiration date. The "ratio" refers to the imbalance between the contracts bought and sold, for example buying one call and selling two calls, written as a 1x2 ratio.
The reason this imbalance matters is that it changes the cost and risk profile of the trade. Because more contracts are sold than bought, the premium collected from the extra short options can partially or fully offset the cost of the long option, sometimes even producing a small net credit. This can make the trade cheap or free to put on, which is the main appeal.
The nuance that trips people up is that selling more options than you buy leaves part of the position "naked," meaning uncovered by an offsetting option. A simple vertical spread (equal numbers bought and sold) has a defined, capped maximum loss. A ratio spread does not necessarily have that protection past a certain price point, because the extra short contracts aren't matched by a long one. If the underlying stock moves far enough in the wrong direction, the uncovered short options can generate losses that grow much larger than the credit received, sometimes theoretically unlimited on the call side or very large on the put side.
Traders typically use ratio spreads when they expect the stock to move to a specific price and stay near it, rather than moving sharply in either direction, since the position often profits most in a narrow range and loses money if the stock overshoots past the short strikes.
Day traders care because a ratio spread's low or negative upfront cost can mask a lopsided risk profile, meaning a fast intraday move against the position can produce losses well beyond what the initial premium suggested.
A stock trades at 100. A trader buys one 100-strike call for 3.00 and sells two 105-strike calls for 1.50 each, collecting 3.00 in premium, which offsets the 3.00 cost of the long call, making the trade roughly free to enter. If the stock closes at 105 at expiration, the trade can reach its maximum profit. But if the stock instead spikes to 115 intraday and the short calls get exercised or need to be closed at a loss, the uncovered second short call can produce a much larger loss than the position's small net cost would have suggested.
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