Ratio Spread
A ratio spread is an options strategy where a trader buys one or more options and sells a greater number of options at a different strike price with the same expiration, creating an uneven number of long and short contracts that can generate income but also carries uncapped risk in one direction.
Unlike standard vertical spreads where the number of bought and sold options is equal, a ratio spread deliberately creates an imbalance. The most common form — the 1x2 ratio spread — involves buying one option and selling two options at a further out-of-the-money strike. This structure generates a net credit (or very low debit) while still providing a meaningful directional profit zone. However, because there is one more short option than long, the position is effectively naked beyond the sold strike.
A call ratio spread example: buy one $100 call and sell two $110 calls on a stock trading at $95. If the stock closes between $100 and $110 at expiration, the position is profitable. If the stock closes well above $110, the unhedged short call creates losses that grow with every dollar increase — capped only by the long $100 call on one side but open on the other. This makes ratio spreads fundamentally different from defined-risk structures.
Traders use ratio spreads when they want to position for a moderate directional move and are willing to accept the risk of an outsized move in the sold direction. In practice, many traders also place stop-losses or manage the position dynamically once the stock approaches the sold strike. Ratio spreads can also be constructed with puts — selling more puts than are purchased — creating risk to the downside.
The margin treatment of ratio spreads at U.S. brokers reflects the uncapped risk component. The additional short option(s) beyond the covered long are treated similarly to naked options for margin purposes, requiring the trader to hold substantial collateral. FINRA Rule 4210 governs margin requirements for these structures and typically mandates that brokers collect margin on the uncovered short legs as if they were naked positions.
Ratio spreads are often compared to ratio backspreads, which are their inverse: selling fewer options at one strike and buying more at another, creating a position that profits from a large move rather than a moderate one. The two structures occupy opposite sides of the volatility spectrum and are chosen based on whether the trader expects the underlying to move significantly or remain rangebound.