Ratio Spread: An Options Strategy Balancing Cost and Risk Through Unequal Contracts

A ratio spread is an options trading strategy that involves buying and selling options of the same type (either all calls or all puts) and expiration date, but in different quantities — creating a ratio between the number bought and sold.
It’s used to reduce upfront cost and benefit from moderate price movements, while limiting gains or increasing risk beyond certain price levels.

In simple terms, a ratio spread means you buy one option and sell more options at another strike price, using the extra sales to help pay for the trade.

Core Idea

The main purpose of a ratio spread is to profit from limited market movement or a specific price range.
By selling more options than you buy, you collect more premium income, which reduces or eliminates the cost of entering the position.
However, because you’re short extra options, your potential losses can increase if the market moves sharply in one direction.

A ratio spread can be created with calls (ratio call spread) or puts (ratio put spread).

In Simple Terms

A ratio spread is like betting that the market will move a little, but not too much.
You earn if the price stays within a certain range — but lose if it moves too far.

Example: Ratio Call Spread

You buy 1 call option with a strike price of $100 (cost = $5).

You sell 2 call options with a strike price of $110 (receive = $3 each).

Total cost = $5 paid – $6 received = net credit of $1.

Outcome:

If the stock stays near $110 at expiration → you keep the $1 credit and possibly gain more.

If the stock surges far above $110 → your short calls lose value faster, creating potentially unlimited losses beyond a certain point.

The best result happens if the stock ends slightly above the short strike at expiration.

Example: Ratio Put Spread

You buy 1 put option with a strike price of $100, and

Sell 2 puts with a lower strike price of $90.

This setup profits if the stock drops moderately but not excessively — a steep fall below $90 increases losses on the extra short put.

Real-Life Application

Traders use ratio spreads to:

Take advantage of neutral to moderately directional outlooks.

Lower the cost of entering an options position.

Generate income from sold options when expecting limited volatility.

They are common among experienced options traders who understand risk management and market ranges.

Advantages

Can be low-cost or even credit-based (you get paid to open it).

Profitable in range-bound or mild-trend scenarios.

Useful for adjusting portfolio exposure to volatility or direction.

Risks and Considerations

Unlimited risk if the underlying price moves strongly against the position.

Complex payoff structure — not suitable for beginners without options experience.

Requires margin for the short options.

Time sensitivity: Performance depends heavily on expiration timing and volatility changes.

Common Misconceptions and Mistakes

“Ratio spreads are risk-free.” They often carry unlimited loss potential on one side.

“They always generate income.” Profits only occur if the market behaves as expected.

“More sold options mean more profit.” Extra short contracts increase potential losses.

“They work best in volatile markets.” Ratio spreads typically benefit from stable or moderately moving markets.

Related Queries Traders Often Search For

What is the difference between a ratio call spread and a ratio put spread?

How is a ratio spread different from a vertical spread?

What are the risks of ratio spreads in volatile markets?

When should traders use ratio spreads?

Can ratio spreads be adjusted before expiration?

Summary

A ratio spread is an options strategy that combines buying and selling unequal numbers of contracts to balance cost and risk.
It profits from small or moderate price moves in the underlying asset, but can suffer large losses if prices move too far.
While ratio spreads can reduce entry costs and generate income, they require precise market expectations and careful risk control.