A ratio spread is an options strategy where the trader buys and sells options in unequal numbers, typically with a ratio of 1:2 or 1:3. The most common form is the front-ratio call spread: buy 1 ATM call and sell 2 further-OTM calls of the same expiry. The trade is often initiated for a small net credit or near-zero cost.
The payoff profile is asymmetric: max profit occurs at the short strike. Above the short strike, the extra short call goes naked and exposes the trade to unlimited (uncovered) loss. Below the long strike, max loss is limited to the net debit (or the trade keeps the credit).
Ratio spreads are typically used to express a moderately bullish (or bearish) view where the trader believes the underlying will rise to a target but not blow through it.
Example 1: Nifty at 24,000. Trader buys 1 x 24,000 call at 200 and sells 2 x 24,400 calls at 110 each (220 credit). Net credit = 20. Max profit at expiry if Nifty closes at 24,400: gain on 24,000 call = 400, loss on 24,400 calls = 0 + 20 credit = 420. Above 24,800, the trade starts losing money on the naked short call; loss grows linearly with each further point.
Example 2: A trader is bullish Reliance but expects it to top out at 3,000. They sell 2 x 3,000 calls for every 1 x 2,950 call bought. The 1:2 ratio gives extra credit and amplifies the profit at 3,000 but exposes them to losses if Reliance breaks 3,050.
The key risk is the naked-short leg above the upper breakeven — sizing must respect tail risk.
Variant: back-ratio spread inverts the structure (buy more than sold), giving long-volatility exposure for a small credit.
Disclaimer: Educational content from MintByte (ARN-314872, MFD). Examples are illustrative. SEBI Investment Adviser registration is in process; we do not recommend specific options trades. Naked-short option positions carry uncapped risk.