A Ratio spread is a, multi-leg options position. Like a vertical, the ratio spread involves buying and selling options on the same underlying security with different strike prices and the same expiration date. In this spread, the number of option contracts sold is not equal to a number of contracts bought. An unequal number of options contracts gives this spread certain unique properties compared to a regular vertical spread. A typical ratio spread would be where twice as many option contracts are sold, thus forming a 1:2 ratio.
Purposeedit
Ideally, this strategy should be used when either A) the implied volatility of the options expiring in a particular month has recently moved sharply higher and is now beginning to decline, or B) the trader believes for whatever reason that the underlying market of the option(s) will move steadily in his favor during the life of the option. The trader will use call options in this strategy if they believe the underlying market will move steadily higher, and put options if they believe the market will move steadily lower.
In the case of call options, the trader will buy some number of options having striking price X and write (sell) a larger number of options having striking price Y, where Y is greater than X. In the case of put options, the trader will buy some number of options having striking price A, but write (sell) a larger number of options having striking price B, where B is less than A.
The "straight" ratio-spread describes this strategy if the trader buys and writes (sells) options having the same expiration. If, instead, the trader executes this strategy by buying options having expiration in one month but writing (selling) options having expiration in a different month, this is known as a ratio-diagonal trade.
As with all option spreads, the trader in a ratio-spread will strongly prefer to buy options having a distinctly lower implied volatility than the options they are writing (selling).
McMillan, Lawrence G. (2002). Options as a Strategic Investment (4th ed.). New York : New York Institute of Finance. ISBN0-7352-0197-8.
April 11, 2024
ratio, spread, multi, options, position, like, vertical, ratio, spread, involves, buying, selling, options, same, underlying, security, with, different, strike, prices, same, expiration, date, this, spread, number, option, contracts, sold, equal, number, contr. A Ratio spread is a multi leg options position Like a vertical the ratio spread involves buying and selling options on the same underlying security with different strike prices and the same expiration date In this spread the number of option contracts sold is not equal to a number of contracts bought An unequal number of options contracts gives this spread certain unique properties compared to a regular vertical spread A typical ratio spread would be where twice as many option contracts are sold thus forming a 1 2 ratio Purpose editIdeally this strategy should be used when either A the implied volatility of the options expiring in a particular month has recently moved sharply higher and is now beginning to decline or B the trader believes for whatever reason that the underlying market of the option s will move steadily in his favor during the life of the option The trader will use call options in this strategy if they believe the underlying market will move steadily higher and put options if they believe the market will move steadily lower In the case of call options the trader will buy some number of options having striking price X and write sell a larger number of options having striking price Y where Y is greater than X In the case of put options the trader will buy some number of options having striking price A but write sell a larger number of options having striking price B where B is less than A The straight ratio spread describes this strategy if the trader buys and writes sells options having the same expiration If instead the trader executes this strategy by buying options having expiration in one month but writing selling options having expiration in a different month this is known as a ratio diagonal trade As with all option spreads the trader in a ratio spread will strongly prefer to buy options having a distinctly lower implied volatility than the options they are writing selling See also editLadder option combination Options spreadReferences editMcMillan Lawrence G 2002 Options as a Strategic Investment 4th ed New York New York Institute of Finance ISBN 0 7352 0197 8 Retrieved from https en wikipedia org w index php title Ratio spread amp oldid 1095553782, wikipedia, wiki, book, books, library,
