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.