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Ratio spread

A spread with unequal leg counts — typically buy one, sell two further out — that collects extra premium at the cost of naked exposure beyond the short strikes.

The extra short contract is what pays for the structure, often turning a debit into a credit. It is also what makes the position dangerous: past the short strike the surplus short option is effectively a naked-call or naked-put, with undefined-risk on that side.

Ratio spreads suit a view that the underlying will move some but not far. Their payoff-diagram rises to a peak at the short strike and then falls away, crossing back into loss if the move keeps going. Broker approval for the naked leg is required, and buying-power-reduction reflects the unhedged contract.

Example: XYZ at $50. Buy one $50 call at $2.30, sell two $55 calls at $0.80 each, for a $0.70 debit. Best case is $430 with XYZ at exactly $55. Above $59.30 the position loses, and it keeps losing dollar for dollar all the way up.

Related: backspread, ratio-write, undefined-risk, broken-wing-butterfly

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.