Ratio spread

A spread with more options sold than bought — it collects extra premium but leaves some uncovered risk.

A ratio spread is an options position where you buy and sell an unequal number of contracts at different strikes, most often selling more than you buy. The classic version is a 1x2 call ratio spread: you buy one call closer to the money and sell two calls at a higher strike. The extra short option usually pays for the long one, so you can put the trade on for a small debit or even a credit.

In practice traders use it when they expect a move toward a target but not far beyond it. Say a stock trades at 100. You buy one 105 call and sell two 110 calls. If the stock drifts up to 110 at expiry, you capture the maximum gain. The catch is the naked short call above 110: past that point your losses grow without a cap, so a sharp rally works against you.

The common mistake is treating it like a cheap directional bet and forgetting the uncovered leg. Always know your upside breakeven and size the position so a gap through the short strikes will not blow up the account. Many traders keep the ratio at 1x2 rather than 1x3 to limit that open-ended risk.

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Educational use only. Quotes are delayed ~15 minutes and nothing here is financial advice. Options trading involves substantial risk of loss.