Definition
Ratio Back Spread
A ratio back spread sells one option and buys more options further out, profiting from a large move in one direction.
A call ratio back spread sells one at-the-money call and buys two higher-strike calls (a net debit or small credit), giving unlimited upside if the underlying rallies hard, while losing only a limited amount if it stalls between the strikes. The put version mirrors it for a downside move.
Indian traders use ratio back spreads on Nifty, Bank Nifty, and stocks when they expect a powerful directional move with rising volatility, since the extra long options gain from both price and vega. The danger zone is a small move that leaves price stuck near the sold strike at expiry.
Related terms
- VegaVega measures how much an option's premium changes when implied volatility rises or falls by 1%.
- Long StraddleA long straddle buys a call and a put at the same strike to profit from a big move in either direction.
- Butterfly SpreadA butterfly spread uses three strikes to bet that the underlying will finish near the middle strike, at low cost and defined risk.
- Ratio SpreadA ratio spread buys and sells options in unequal numbers, such as buying one call and selling two, to lower cost or add credit.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.