Definition
Ratio Spread
A ratio spread buys and sells options in unequal numbers, such as buying one call and selling two, to lower cost or add credit.
A common call ratio spread buys one at-the-money call and sells two further out-of-the-money calls. The extra sold option can make the trade free or even a net credit, profiting if the underlying rises moderately to the short strike but exposing you to risk if it rallies far beyond it.
On the NSE, traders use ratio spreads on Nifty and stocks to express a moderately directional view cheaply, or to position for a stall at a resistance level. The naked extra short leg means the risk is open-ended on one side, so position sizing and SPAN margin must be watched carefully.
Related terms
- Bull Call SpreadA bull call spread buys a lower-strike call and sells a higher-strike call to bet on a moderate rise at lower cost.
- Butterfly SpreadA butterfly spread uses three strikes to bet that the underlying will finish near the middle strike, at low cost and defined risk.
- Calendar Spread (Options)A calendar spread sells a near-term option and buys a longer-term option at the same strike to profit from time decay and volatility.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.