Ratio Spreads
What It Is
A ratio spread involves buying and selling options in unequal quantities, typically selling more options than are purchased.
Why It Matters
It allows traders to reduce cost or generate credit while maintaining directional exposure.
How It Works
- Buy one option
- Sell two or more options at different strikes
- Creates asymmetric risk
- Profit depends on controlled price movement
Key Components
- Unequal contract quantities
- Directional bias
- Potential for unlimited risk
- Lower cost or net credit
Example
Buying one $50 call and selling two $55 calls creates a call ratio spread.
Key Takeaways
- Ratio spreads reduce cost.
- They require careful risk management.
- Best when expecting moderate price movement.