Ratio Spread Calculator

What is a Ratio Spread?

A Ratio Spread is an options trading strategy where you buy a certain number of options and sell a larger number of options at a different strike price. The most common ratio is 1:2 (buy 1, sell 2), but other ratios like 2:3 or 1:3 are also used.

There are two main types:

• Call Ratio Spread: You buy calls at a lower strike and sell more calls at a higher strike. This is typically a neutral-to-bullish strategy.
• Put Ratio Spread: You buy puts at a higher strike and sell more puts at a lower strike. This is typically a neutral-to-bearish strategy.

How to Use This Calculator

1. Select Strategy Type: Choose between Call Ratio Spread or Put Ratio Spread.
2. Enter Market Data: Input the current stock price.
3. Configure Long Leg: Enter the strike price, premium, and quantity for the option you are buying (usually the one closer to the money).
4. Configure Short Leg: Enter the strike price, premium, and quantity for the options you are selling (usually further out of the money). Ensure the quantity is higher than the long leg for a standard ratio spread.
5. Calculate: Click the button to see your max profit, max loss, and breakeven points.

Why Trade Ratio Spreads?

Traders use ratio spreads to reduce the cost of a long position or to generate a small credit while maintaining some directional exposure.

• Low Cost / Credit: By selling more options than you buy, you can often enter the trade for a net credit or a very small debit.
• Profit Zones: The strategy can profit if the stock stays flat, moves slightly in your direction, or even moves slightly against you (if done for a credit).
• Volatility Play: It can benefit from a drop in implied volatility, as you are net short options (short vega).

Risks to Consider

The primary risk of a standard ratio spread (where you sell more than you buy) is unlimited risk (for calls) or substantial risk (for puts) if the market moves significantly past your short strikes. Because you have uncovered short options, a strong move can result in large losses. This strategy is generally recommended for experienced traders who understand how to manage uncovered option risk.

Frequently Asked Questions