A ratio spread is an option strategy that uses an unequal number of long and short contracts. The trader buys one option and sells more than one of a different strike, both with the same expiry. The strategy can earn a credit but adds risk from the extra short contracts.<\/p>\n
This guide explains how the ratio spread works and how Indian traders can use it.<\/p>\n
A ratio spread is a two-strike option strategy. It uses an uneven number of contracts.<\/p>\n
The most common versi<\/a>on is a 1:2 ratio spread.<\/p>\n The strategy gains when the underlying moves to the short strike and stays there at expiry. The short legs decay while the long leg holds value.<\/p>\n If the underlying moves far past the short strike, the trade can face large losses because of the extra short contracts.<\/p>\n Traders use this strategy when:<\/p>\n The trade-off is asymmetric risk.<\/p>\n A typical bullish<\/a> ratio call spread:<\/p>\n The trade earns a credit or low cost.<\/p>\n A typical bearish<\/a> ratio put spread:<\/p>\n The trade often earns a credit too.<\/p>\n You can use this strategy on:<\/p>\n Liquidity<\/a> matters since extra short legs need active management.<\/p>\n Suppose Nifty trades at 22,000. You expect it to rise to 22,200 and stall.<\/p>\n Maximum profit at 22,200 = (200 – 30) = ₹170 per point per lot<\/p>\n Risk beyond 22,400 grows because of extra short calls<\/p>\n Plan stops or hedges before entry.<\/p>\n The ratio spread has clear features:<\/p>\n This makes it a strategy for experienced traders.<\/p>\n The strategy fits when:<\/p>\n Match these conditions to your view.<\/p>\n Avoid this trade when:<\/p>\n A mismatch can lead to large losses.<\/p>\n New traders often:<\/p>\nHow a Ratio Spread Works<\/h2>\n
Why Use a Ratio Spread<\/h2>\n
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Ratio Call Spread Setup<\/h2>\n
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Ratio Put Spread Setup<\/h2>\n
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Ratio Spread in Indian Markets<\/h2>\n
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Example of a Ratio Spread<\/h2>\n
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Risk and Reward<\/h2>\n
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When to Use a Ratio Spread<\/h2>\n
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When Not to Use It<\/h2>\n
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Common Mistakes With the Strategy<\/h2>\n