Ratio Spread
A Ratio Spread buys one option and sells multiple options at a further strike — typically a 1×2 — generating credit but with tail risk on the short side.
At a glance
Strategy Snapshot
Market View
Mild directional bias with stable to falling IV.
Net Cost
Often a small credit or near-zero cost.
Legs
Buy 1 ATM Option + Sell 2 OTM Options (same expiry)
Max Profit
At the short strike at expiry.
Max Loss
Unlimited beyond the short strikes (call ratio) or large below (put ratio).
Breakeven
Two breakevens — between strikes and beyond shorts.
Build
Strategy Construction
Color-coded legs — emerald for long positions, rose for short positions. Strikes shown around reference spot 100.
- BUYLeg 1
1 × 100 CE
Premium 3.00
- SELLLeg 2
2 × 110 CE
Premium 1.00
Visualize
Payoff at Expiry
Conceptual payoff with reference spot = 100. Strikes and premiums shown are illustrative.
Sensitivity
Greeks Exposure
Net portfolio Greek exposure for a typical setup. Bars show directional sensitivity from −1 (short) to +1 (long).
Delta
Directional exposure to underlying price.
+0.20
Long
Gamma
Sensitivity of Delta to price changes.
-0.30
Short
Theta
Time decay exposure (per day).
+0.30
Long
Vega
Sensitivity to implied volatility shifts.
-0.30
Short
Strengths
Advantages
Why traders use it
- Often opened for near-zero cost or credit.
- Profits in a sweet spot at the short strike.
- Theta-positive on the short legs.
Trade-offs
Risks & Disadvantages
What can go wrong
- Unlimited risk beyond the short strikes.
- Adverse moves can blow up the position.
- Requires precise view on magnitude.
Avoid
Common Mistakes
Watch out for
- Underestimating tail risk.
- Ignoring margin requirements on extra short legs.
- Not setting stop rules.
AI Insight
LiveRatio Spreads earn premium with a pinning sweet spot but carry tail risk on the short side. Reserve them for high-conviction views with strict size limits.
Generated by NextQuantLabs AI — for educational guidance only.
Questions
Frequently Asked
Why is Ratio Spread risky?+
The extra short option creates undefined risk beyond the short strike, similar to a naked short.
Best market for Ratio Spread?+
Low to moderate volatility with a clear directional bias and a pinning target.