Ratio Spread

DEFINITION of 'Ratio Spread'

An options strategy in which an investor simultaneously holds an unequal number of long and short positions. A commonly used ratio is two short options for every option purchased.

BREAKING DOWN 'Ratio Spread'

A ratio spread would be achieved by purchasing one call option with a strike price of $45 and writing two call options with a strike price of $50. This would allow the investor to capture a gain on a small upward move in the underlying stock's price. However, any move past the higher strike price ($50) of the written options will cause this position to lose value. Theoretically, an extremely large increase in the underlying stock's price can cause an unlimited loss to the investor due to the extra short call.

RELATED TERMS
  1. Bear Call Spread

    A type of options strategy used when a decline in the price of ...
  2. Short Leg

    Any contract in an option spread in which an individual holds ...
  3. Bull Call Spread

    An options strategy that involves purchasing call options at ...
  4. Call Ratio Backspread

    A very bullish investment strategy that combines options to create ...
  5. Diagonal Spread

    An options strategy established by simultaneously entering into ...
  6. Bull Put Spread

    A type of options strategy that is used when the investor expects ...
Related Articles
  1. Trading

    How To Manage A Bull Call Spread

    A bull call spread, also called a vertical spread, involves buying a call option at a specific strike price and simultaneously selling another call option at a higher strike price.
  2. Trading

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
  3. Trading

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  4. Investing

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  5. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  6. Trading

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  7. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  8. Trading

    Get Familiar with These 6 Option Strategies

    When you’re ready to move beyond the basics of investing, it’s time to learn your options.
  9. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  10. Investing

    Types of Options

    There are many different types of options. In addition to general put options and call option, we will discuss 13 different types of options. Some of these option types are better suited to day ...
RELATED FAQS
  1. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  2. How does the term 'in the money' describe the moneyness of an option?

    Find out what in the money means about the moneyness of call or put options and what it indicates about the relationship ... Read Answer >>
  3. What is the difference between in the money and out of the money?

    Learn about how the difference between in the money and out of the money options is determined by the relationship between ... Read Answer >>
  4. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
  5. What options strategies are best for investing in the industrial sector?

    Learn a couple of popular options trading strategies that can be used by investors seeking to enhance their profits from ... Read Answer >>
  6. How do I set a strike price in an options spread?

    Find out more about option spread strategies, and how to set the strike prices for bull call spreads and bull put spreads ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center