Saxo Group
A ratio spread is an options strategy where a trader simultaneously buys and sells options in an unequal proportion. Unlike a standard vertical spread, which maintains a 1:1 ratio between long and short contracts, a ratio spread introduces an imbalance that creates asymmetric profit potential and risk.
The two most common configurations include a ratio call spread, which is a bullish strategy using call options, and a ratio put spread, which is a bearish strategy using put options.
There are two ways to construct a ratio call spread depending on your market outlook.
1. If you are moderately bullish, expecting the stock to move towards the short strike but not beyond it significantly, you would buy 1 at-the-money (ATM) call and sell multiple out-of-the-money (OTM) calls.
Example: Buy 1 call at USD 100 strike, sell 2 calls at USD 110 strike.
Maximum profit occurs if the underlying expires at the short strike price. If the price exceeds the short strike significantly, you start facing unlimited risk due to the uncovered short calls.
2. If you are bearish to neutral, expecting limited upside movement, you would sell 1 ATM call and buy multiple OTM calls.
Example: Sell 1 call at USD 100 strike, buy 2 calls at USD 110 strike.
This generates an upfront credit and remains profitable if the underlying asset remains below the short strike, but faces risk if there is an extreme upside move.
Similarly, there are two ways to construct a ratio put spread using put options.
1. If you are moderately bearish, expecting a decline but not a crash, you would buy 1 ATM put and sell multiple OTM puts.
Example: Buy 1 put at USD 100 strike, sell 2 puts at USD 90 strike.
Maximum profit is achieved if the underlying expires at the short strike price. If the price falls too much, however, you face unlimited downside risk.
2. If your sentiment is neutral to slightly bullish, expecting a floor under price movement, you would sell 1 ATM put and buy multiple OTM puts.
Example: Sell 1 put at USD 100 strike, buy 2 puts at USD 90 strike.
This generates an upfront credit and remains profitable if the underlying stays above the short strike.
When setting up a ratio spread you must consider the strike price and expiration. If you’re expecting gradual price movement you should choose strike prices that are further apart, whereas if you are expecting rapid movement, you are better off selecting strikes closer together.
There are also factors to consider when choosing an expiration date. Contracts with a near-term expiration give you more exposure to time decay (theta). Meanwhile contracts with a longer-term expiration provide more sensitivity to implied volatility (vega).
A high-kurtosis market means extreme moves are more likely. If you sell multiple options (short ratio spread), you are vulnerable to tail risk. If you buy multiple options (long ratio spread), you can profit significantly from a fat-tail event.
A trader can use a ratio spread in conjunction with an existing position in the underlying asset.
Suppose you own 1 Crude Oil futures contract at USD 100. You establish a 1x2 ratio call spread by:
There are three potential outcomes depending on how the Crude Oil futures price moves. If the market stays below USD 105, your calls expire worthless, but you may make a profit on your long future. If the market rises to USD 115, you will make a profit on your long future and the bull 105-115 call spread. Above USD 115, your gains are capped due to the extra short call. The synthetic position here is akin to a bull call spread plus a covered call. Ideally, this ratio call spread would have been done at zero cost or even earning some premium.
Suppose you are short 1 Gold future at USD 3000. You establish a 1x2 ratio put spread by:
If the future declines moderately, your put options provide additional gains. If the future crashes below USD 2700, the gains on your short future will stop at USD 2700 because you are short an additional future. However, if futures move lower down to USD 2700 without going lower, you will have earned more than just your short future because you gained on the put spread. Similar to the ratio call spread and the long future, this position allows you to leverage your underlying view and is ideally done at zero cost or even at a premium.
The biggest potential negative when using a ratio spread as a directional idea is that the trader can be ‘too correct’. If a trader’s directional call is correct, but the underlying moves above the short calls (below the short puts), they will begin to incur losses even with a correct directional view.
When selling one and buying multiple options, the trader’s view is typically that either nothing happens or a very large move happens. This is often the case around a major market catalyst that many are focused on. Either the news is as expected and is a non-event, or it is a complete surprise and there is a large directional move. The risk is moving right to the strike where the trader is long multiple options and stopping, as this is the max loss on short options and the max pain for time decay.
A ratio spread is like managing inventory—you can sell multiple units to enhance profits, but you must manage risk carefully. Whether you are buying or selling options in a 1:x ratio, this strategy allows traders to express directional views with leveraged exposure. By considering skew, kurtosis, and market conditions, traders can use ratio spreads to maximise returns while carefully managing downside risk. When combined with an underlying position, ratio spreads can provide additional flexibility, allowing traders to fine-tune their risk-reward profile.
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