Options Academy
Ratio Call Spreads 103: Philosophies & Ratios
There are three major approaches: ratio-write substitute, credit-only, and delta-neutral spreads.
Philosophy 1: Ratio Write Substitute
Buy a deep ITM call with little time value and sell multiple higher-strike calls.
If the long call is near parity, the ratio spread can mimic a ratio write with less capital.
Ratio Write vs Ratio Spread (Example)
Example: Stock $50, July $40 call at $11, July $50 call at $5.
Ratio write: Buy 100 shares and sell 2x $50 calls.
Ratio spread: Buy 1x $40 call and sell 2x $50 calls.
The spread uses less capital and reduces downside risk, at the cost of a slightly smaller profit range.
Ratio Write Profit Range
$40 to $60
Ratio Spread Profit Range
$41 to $59
Ratio Write Max Profit
10 points
Ratio Spread Max Profit
9 points
Philosophy 2: Credit-Only Spreads
Some traders require a credit so the downside risk is zero.
This is mildly bullish: the stock needs to rise toward the short strike for max profit.
Philosophy 3: Delta Spread
Use deltas to set a neutral ratio: divide long-call delta by short-call delta.
Example: deltas of 0.80 and 0.50 imply a neutral ratio of 1.6:1 (16:10 or 8:5).
Long Delta
0.80
Short Delta
0.50
Neutral Ratio
1.6:1
Tradeable Ratio
16:10 or 8:5
Altering the Ratio
Higher ratios increase credit but lower the upside break-even, increasing upside risk.
Lower ratios reduce upside risk but produce smaller credits.
3:2 Ratio
Lower upside risk
2:1 Ratio
Balanced
3:1 Ratio
Higher credit, higher risk
Max Practical Ratio
Rarely above 4:1
Delta Spread Screens
Avoid ratios above 4:1 and below 1.2:1 (6:5).
Avoid short options priced below 0.5 point.
Limit total debit to around 1 point per long call.
Key takeaways
- Ratio spreads can mimic ratio writes with less capital if the long call is near parity.
- Credit-only spreads eliminate downside risk but keep upside risk.
- Delta spreads target neutrality using the ratio of deltas.
- Use screens to avoid extreme ratios and excessive debits.
Series
Ratio Call Spread Masterclass
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