spreadsMedium RiskVolatile / Directional
Ratio Back Spread
Sell one option, buy two further OTM options. Profits from large directional moves.
What is a Ratio Back Spread?
You sell one ATM or ITM option and buy two OTM options. The net cost is low or even a credit. You profit if the stock makes a big move in the direction of the long options. The danger zone is a moderate move — you could lose at expiration if the stock sits between your strikes.
When to use it
Use before major events (earnings, FDA decisions) when you expect a big move but IV makes outright options expensive. Best set up for a credit or zero cost.
Structure
Sell 1 closer option + buy 2 further OTM options, same expiration.
Key Metrics
Max Profit
Unlimited above the long strikes (for calls). Large if stock makes a big move.
Max Loss
Difference between strikes − credit received (if any), at the short strike.
Breakeven
Two breakevens — one between strikes, one above long strikes.
Greeks Profile
Vega: net positive (wants IV to stay high). Delta: positive (call ratio) or negative (put ratio). Gamma: positive.
Tips & Best Practices
- 1Try to enter for a credit or zero debit — the trade is free if the stock doesn't move.
- 2The loss zone is between the short and long strikes — be aware.
- 3Great for high-IV situations where you expect a directional resolution.
- 4Exit before expiration if the stock moves strongly in your favor.
See it in action
Model a Ratio Back Spread with a real ticker. See the P&L chart, heatmap, and exact breakevens.
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