Strategy guide
Ratio Spreads Explained
A ratio spread uses more short options than long options at different strikes. It is typically used to target a specific directional or volatility view, but it introduces more complex risk than basic spreads.
How ratio spreads work
A common setup is buying one option and selling two options at a different strike in the same expiry. This unequal ratio changes the payoff shape and can create zones with very different risk behavior.
Depending on strikes and premium, the trade can benefit from moderate moves, but large moves can increase risk quickly.
Why traders use them
- expressing a precise directional target
- lowering initial cost compared with single-leg options in some setups
- taking a specific view on volatility and expiration behavior
Key risks and considerations
Because short contracts can outnumber long contracts, risk may expand beyond a target price zone. Assignment risk and rapid P/L shifts near expiration should be planned for in advance.
Position sizing and scenario planning are especially important with ratio spreads.
How to evaluate ratio spreads in OTL2
Model multiple expiration outcomes and stress-test moves past short strikes. Focus on break-even points, worst-case zones, and how changes in price affect risk through time.