Alert

tastycrypto’s software will enable users to custody, control, and take ownership of their digital assets.
tastytrade logo
Best PracticesRatio Spread | Aug 10, 2015
Up Next
    Best PracticesRatio SpreadAug 10, 2015

    This segment discusses and explains ratio spreads using puts or calls. Specifically, we explain under what conditions ratios are best placed and why.

    A ratio spread is the purchase and sale of calls or puts in the same underlying and in the same expiration at different strikes and different amounts. It is usually done for a credit. The classic ratio spread is 1x2 and an example was shown using SPY of buying one 212 put and selling two 206 puts. Tom Sosnoff and Tony Battista use the Dough platform to show the setup of the trade.

    When entering a ratio spread a trader should look for high IV and high IVR. The idea is to buy an ITM or ATM call (or put) and sell 2 farther out calls (or puts) for a total credit. The high IV and high IVR makes that possible

    A call ratio spread has unlimited risk to the upside above the breakeven point. A put ratio spread has practically unlimited risk to the downside below the breakeven point. The maximum profit is the difference between the strikes plus the credit received but that is rarely achieved as the short strike would have to be pinned.

    A table was displayed of a ratio spread versus a naked short position in FCX. Both scenarios showed the price received, breakeven price, margin used, probability of profit (POP) and max return on capital (ROC). It was used to explain some of the reasons for entering a ratio spread. Some of those reasons are the elimination of risk in one direction (eg. no downside risk in call ratio), a slight directional bias, a more distant break-even compared to a naked put or call and compared to a vertical a reduced cost basis.

    There are some downsides to a ratio spread. It has unlimited risk in one direction and the chance that the max profit can be reached is low. It requires patience and the discipline of managing winners. The max profit is limited and the profit range is narrow (not counting on the range for keeping credit received). Volatile markets can be a problem.

    The upsides, besides the risk only being to one side, is that the POP is higher and it is highly customizable. Different ratios can be used and calendar features can be included.

    Watch this segment of Best Practices with Tom Sosnoff and Tony Battista for a discussion on how and why to use ratio spreads.

    The traders in this segment are using features of Dough, our trading platform.
    Click here to learn more

    More like this

    tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

    tastytrade is a trademark/servicemark owned by tastytrade.

    tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

    tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

    Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

    © copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.