Strategy · 5 min read
The Ratio Spread strategy
A ratio spread buys one option near the money and sells a larger number (commonly two) further out — for example, a 1×2 call ratio spread. It can often be opened for a net credit and profits within a band, but it carries open-ended risk beyond the short strikes because the extra short is unhedged.
Structure
A classic 1×2 ratio spread:
- Buy 1 near-the-money option
- Sell 2 further-OTM options of the same type
Reward and the risk warning
Best case, the underlying drifts toward the short strikes at expiry and you keep the credit plus the spread value. But beyond the short strikes the extra naked short means loss is open-ended (call ratio: above; put ratio: below). A ratio condor combines both and is uncapped on both sides. These are advanced — size and hedge carefully.
FAQ
Why is a ratio spread risky?
The extra short leg is unhedged, so beyond the short strikes the loss is open-ended — unlike a fully hedged spread.
Who should trade ratio spreads?
Experienced traders who understand and can manage the open-ended tail risk. Beginners should start with defined-risk spreads.
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