Ratio spread

A ratio spread is an options strategy that involves buying and selling an unequal number of options at different strikes, typically buying one option and selling two. This uneven ratio creates a position that can be entered at low cost or even for a credit, while profiting from a moderate directional move. The tradeoff is an uncovered leg that introduces additional risk if the stock moves too far.

Bias: Directional (bullish for call ratio spreads, bearish for put ratio spreads) Risk profile: Undefined on one side due to the extra short option Ideal conditions: You expect a moderate move to a specific price target, with elevated IV to inflate the options you are selling

How it is constructed

The most common ratio spread is the call ratio spread (1x2):

• Buy 1 call at a lower strike (closer to the money)
• Sell 2 calls at a higher strike (further OTM)

Because you are selling two options and buying only one, the premium collected from the two short calls often offsets or exceeds the cost of the single long call, resulting in a low-cost or credit position.

The put ratio spread is the mirror image:

• Buy 1 put at a higher strike
• Sell 2 puts at a lower strike

Setup example

AAPL is at $185, and you expect it to rise moderately to around $195 over the next month but not much beyond.

• Buy 1 $190 call for $4.00 (pay $400)
• Sell 2 $200 calls for $2.10 each (collect $420)
• Net credit: $20

You have entered a bullish position for a small credit. If AAPL rises toward $200, the long $190 call gains value while the short $200 calls remain OTM.

The profit zone and the risk

Maximum profit occurs at the short strike ($200 in this example). At $200 at expiration:

• The long $190 call is worth $10 (intrinsic value)
• Both short $200 calls expire worthless
• Total profit: $10 plus the $20 credit = approximately $1,020

Above the short strike, the position becomes problematic. Beyond $200, you are effectively short one extra naked call (you sold two calls but only one is covered by your long call). Each dollar above $210 (the point where the extra short call losses exceed the gains) generates a loss.

This is the defining risk of the ratio spread: the uncovered short option. If the stock moves far beyond your target, the extra short call creates undefined risk to the upside (for call ratio spreads) or substantial risk to the downside (for put ratio spreads).

Upper breakeven: approximately $210 in this example (short strike plus the width between strikes plus the credit). Beyond this point, the position loses money and the loss grows as the stock rises.

When to use a ratio spread

Best conditions:

• You expect a moderate directional move to a specific target, not an explosive move
• IV is elevated, inflating the premium of the two options you are selling
• You have a clear view that the stock will not blow past your short strike
• You want a low-cost or credit entry for a directional bet

Avoid when:

• You expect a large, fast move (the uncovered leg turns a winning directional call into a loss beyond the breakeven)
• IV is low (the short options do not collect enough premium to justify the risk)
• You are not able to actively monitor and manage the position

Why the ratio matters

The 1x2 ratio is the most common, but other ratios exist (2x3, 1x3). The more extra short options you add, the more premium you collect upfront, but the greater the risk beyond the short strike. A 1x3 ratio collects more credit but has two uncovered short options instead of one, dramatically increasing the risk if the stock runs.

For most traders, the 1x2 ratio is the standard because it balances the low-cost entry against a single uncovered leg.

Managing a ratio spread

The key management concern is the uncovered leg. If the stock approaches your short strike and threatens to exceed it:

• Close the position before the stock breaches the upper breakeven, taking your profit near the maximum profit zone at the short strike
• Roll the short options up and out to a higher strike to give more room, though this may reduce or eliminate your credit
• Convert to a defined-risk structure by buying an additional call above your short strikes, capping the uncovered risk (this turns it into a defined-risk butterfly-like structure)

The ratio spread is an advanced strategy specifically because of this active management requirement. The uncovered leg means you cannot simply enter and forget it.

Related terms: Bull call spread, credit spread, naked call, defined risk, undefined risk, IV rank

Try it on Stryke: Analyze strikes and IV rank to construct ratio spreads with favorable premium in the Options Screener.