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Ratio Spread Adjustments

From Theory To Practice

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The ratio spread is one of our favorite strategies. With this strategy, we are able to generate positive theta and get paid in the event of non-movement in the underlying. Not only that, but we also make money if we are “wrong” in our likely assumption regarding the direction of the underlying because of the disappearing delta nature of a ratio spread. However, we run into problems, if we happen to be a little too right on that directional assumption. In this segment, Mike joins us in the studio to work through a couple possible adjustments that we can make. What we learn is that one of the driving forces behind how we might manage a ratio spread rests with how aggressively we want to reduce our cost basis.

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