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Ratio Spread

You're bullish on ETH but you think the rally tops out around 2,800. You don't want to pay 4,500 for an ATM call. A 1x2 ratio spread lets you buy one call, sell two further out, and get into the trade for near-zero cost. If ETH rallies to 2,800, you make 5k. If it overshoots to 3,500, you start losing money on the naked short.

That's the deal. A partially-financed directional bet with a built-in view on skew: you think the OTM calls you're selling are overpriced relative to the ATM call you're buying. You're monetizing that view.

💡

A ratio spread is a directional bet funded by selling vol. If you're right on direction but wrong on magnitude, it turns against you.

What You Do (1x2 Call Ratio)​

The Setup
Buy1 call at lower strike (K1)
Sell2 calls at higher strike (K2)
Max Profit
At K2
Downside Loss
Net debit (or $0)
Upside Risk
Unlimited above K2
Cost
Low or zero

The 1x2 is the standard ratio. Buy 1, sell 2. The extra short call partially or fully finances the long. Some traders go 1x3 for even more financing (and even more risk). The principle is the same: unbalanced legs, unbalanced risk.

How the P&L Works​

  1. Below K1. All options expire worthless. You lose the net debit. If the trade was done at zero cost, you lose nothing. Walk away.
  2. Between K1 and K2. The sweet spot. The long call gains value. The short calls are still OTM. Pure directional profit.
  3. At K2. Max profit. The long call is worth (K2 - K1). Both short calls are ATM with no intrinsic value.
  4. Above K2. The extra short call kicks in. You're net short one call above K2. Losses grow linearly. There is no cap.

Worked Example​

ETH at 2,340. You're moderately bullish -- maybe a rally to 2,700-2,800 over the next 3 weeks, but you don't see 3,000+. OTM call IV is elevated because the market is pricing in upside skew from ETF flow speculation.

Buy 1x 2,400 call for 185. Sell 2x 2,700 calls for 95 each = 190. Net credit: 5 (essentially zero-cost).

ETH at Expiry
Long Call
Short Calls (2x)
P&L
$2,200
$0
$0
+$5
$2,400
$0
$0
+$5
$2,550
+$150
$0
+$155
$2,700
+$300
$0
+$305
$2,850
+$450
-$300
+$155
$3,005
+$605
-$610
$0
$3,200
+$800
-$1,000
-$195
$3,500
+$1,100
-$1,600
-$495

Free entry. Max profit at 2,700. Break-even again around 3,005. After that, every dollar ETH moves higher costs you a dollar. If ETH rips to 3,500 on a surprise ETF approval, you're down 495 and growing.

Explore the Payoff​

Spot at Expiry$100k
$70k$130k
Net Cost$0k
$0k$4k
BE $115k$0+$10k-$15k$70kK1 $95kK2 $105k$130kSpot Price at ExpiryP&L
Settlement
$100k
P&L
+5.0k
Max Loss
Substantial
Max Gain
+$10k

When to Use​

  • You're moderately bullish (or bearish for a put ratio) and you have a target and believe the underlying won't significantly overshoot it
  • You want to finance your long option by selling extra premium, getting in cheap or free
  • You have a view on skew: the OTM strikes you're selling are overpriced relative to your long strike
  • You're experienced enough to manage a naked short if the trade goes through the upper strike

Ratio spreads are desk-level trades. They show up constantly in crypto fund books because the skew on BTC and ETH is often steep enough to make the financing very attractive. But the unlimited risk leg demands respect.

Common Mistakes
The mistakePutting on a ratio spread and treating the naked leg like it can't hurt you.
The realityThe extra short call is an uncapped liability. BTC moving 25% in a week has happened dozens of times. If you sell 2x $105k calls against 1x $95k call and BTC goes to $130k, you owe $25k on the naked leg. Have a stop or a hedge plan before you enter.
The mistakeUsing ratios wider than 1x2 without understanding the margin hit.
The realityA 1x3 ratio has two naked short calls. Margin requirements scale non-linearly on most venues. The extra premium you collect from the third short leg is not worth the margin drag and the tail risk. Stick to 1x2 unless you have a very specific reason.
The mistakeSelling the ratio into rising IV without a catalyst for the IV to come down.
The realityIf IV is elevated and rising, the short legs get more expensive over time -- your mark-to-market suffers. Ratios work best when you're selling elevated IV that has a clear catalyst for mean-reversion (post-event crush, term structure normalization).
⚠️

Ratio spreads have unlimited risk on one side. The extra short option is unhedged above K2. If the underlying rips through your short strikes, you need to close or hedge the naked leg immediately. This is not a set-and-forget structure.

Greeks at a Glance​

Greek
Sign
Plain English
Delta
+
Net long delta below K2. Above K2, delta flips negative as the extra short call dominates. The position can go from long to short in a rally.
Gamma
+/-
Positive below K2 (the long call's gamma). Negative above K2 (two short calls overpower one long). The gamma flip is where the danger lives.
Theta
+/-
Mixed. Below K2, the long call bleeds theta. Above K2, the shorts bleed more. Depends on where spot is relative to the strikes.
Vega
-
Net short vega (2 short legs vs 1 long). Rising IV across the board hurts. This is partly the point -- you're selling vol on the extra leg.

Related:

  • Bull Call Spread, the balanced 1x1 version (no naked leg)
  • Butterfly Spread, add a long wing to cap the upside risk
  • Skew, the vol surface shape that makes ratio spreads attractive
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