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Optimal Ratio Spread Placement

Options Jive

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

A ratio spread will gain its maximum profit when its underlying price is equal to its short leg’s strike. Therefore, if we want to set up a ratio spread in order to have the largest probability to gain the maximum profit, we need to focus on choosing the appropriate delta for its short position.

According to our study on SPY, stock movement is relatively symmetric with slight upward bias and downside outliers. Based our study, the 25 delta put is appropriate for put ratios, because the average downward movements of the stock in 45 days is -4.5%, which corresponds to the 25 delta put strike. And similarly, 30 delta call is appropriate for call ratios, because the average upward movements of the stock in 45 days is +3.7%, which corresponds to the 30 delta call strike.

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