Options Academy
Ratio Call Spreads 101: Structure & Payoff
A ratio call spread buys one call and sells more calls at a higher strike. Downside is limited, upside can be unlimited.
The 2:1 Structure
A classic ratio call spread buys 1 call at a lower strike and sells 2 calls at a higher strike, all with the same expiration.
It is a hybrid of a bull spread and a naked call write. That is why downside risk is limited but upside risk is open-ended.
Example: XYZ 40/45 (Credit)
XYZ is at $44.
Buy April $40 call for $5 and sell two April $45 calls for $3 each.
Net Credit: $1.00 (receive $6, pay $5).
At expiration, max profit occurs at $45.
Long Call
Buy 1 April $40
Short Calls
Sell 2 April $45
Net Credit
$1.00
Max Profit Point
$45
Profit Range and Downside
Below the lower strike, both options expire worthless and your profit equals the initial credit.
Between the strikes, the long call gains intrinsic value while the shorts are still OTM.
Above the upside break-even, the extra short call dominates and losses accelerate.
Profit Below $40
+$100 (credit kept)
Max Profit
+$600 at $45
Upside Break-even
$51
Upside Risk
Unlimited
Expiration P/L Snapshot
Below is the profit profile for the example. Notice the profit peak at $45 and the upside break-even around $51.
Ratio Call Spread P/L at Expiration
- profit
Quick Table
Profit is capped on the downside, but turns negative after the upside break-even.
Stock $35
+$100
Stock $45
+$600
Stock $51
$0
Stock $55
-$400
Key takeaways
- A ratio call spread is long 1 call and short multiple higher-strike calls.
- Max profit occurs at the short strike; upside risk is open-ended.
- Downside risk is limited and can be zero if entered for a credit.
- The payoff looks like a tent that tilts negative after the upside break-even.
Series
Ratio Call Spread Masterclass
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