Ratio call spreads | Advanced strategies | Strategies

Ratio call spreads

A ratio strategy is an options strategy with an unbalanced number of contracts on each side. Previously, we covered ratio call and put writes. Here, we’ll focus on ratio call spreads, which are call spreads with a “heavy” side (more contracts) and a “light” side (fewer contracts).

For example, assume an investor establishes the following positions:

Long 1 ABC Jan 50 call at $9
Short 2 ABC Jan 60 calls at $4

ABC’s market price = $51

The key to ratio strategy questions is to identify the heavy side and then ask: Is any part of that heavy side uncovered? Here, the investor is short two calls. One short call is covered by the long call, but the other short call is naked (uncovered).

That uncovered short call drives the risk. A short naked call has unlimited loss potential: the higher ABC’s market price rises, the larger the loss on the uncovered call.

In terms of market outlook, this position resembles a long (debit, bull) call spread, but with amplified outcomes. The investor is essentially expecting ABC to rise toward $60, but not continue rising far beyond it.

Let’s work through some practice questions:

Long 1 ABC Jan 50 call at $9
Short 2 ABC Jan 60 calls at $4

ABC’s market price = $51

Maximum gain?
Maximum loss?
Breakeven(s)?
Gain or loss if ABC rises to $75?
Gain or loss if ABC rises to $55?

Can you figure it out?

(spoiler)

Maximum gain = $900

Start by finding the net cost (or credit) to establish the position:

Pay $9 for the long call
Receive $8 total for the two short calls ($4 × 2)

Net cost = $1 per share ($9 − $8) = $100 total ($1 × 100 shares).

Maximum gain occurs at $60 at expiration:

The long 50 call is $10 in the money (worth $10 intrinsic value).
Both short 60 calls are at the money (no intrinsic value) and expire.

The long call can be exercised to buy at $50 and sell at $60, producing $10 per share = $1,000.

Net maximum gain = $1,000 − $100 = $900.

Maximum loss = Unlimited

One of the short calls is uncovered. If ABC rises above $60, all three calls are in the money:

The long call offsets the loss on one short call.
The other short call remains naked and keeps losing as ABC rises.

Because a naked short call can lose without limit, the maximum loss is unlimited.

Breakevens = $51 and $69

This ratio call spread has two breakeven points.

Lower breakeven: $51

The position cost is $1 per share ($100 total). At $51, the long 50 call has $1 of intrinsic value ($51 − $50), which is $100 total. That offsets the $100 net debit.

Upper breakeven: $69

We already found the maximum gain is $900 at $60. Above $60, the uncovered short call creates additional losses (the long call and one short call offset each other).

At $69, the uncovered short 60 call is $9 in the money ($69 − $60), which is a $900 loss ($9 × 100). That offsets the $900 maximum gain.

Gain or loss if ABC rises to $75 = $600 loss

One approach is to use the upper breakeven:

At $69, gain/loss is $0.
From $69 to $75 is $6 higher.
The uncovered short call loses an additional $6 per share = $600.

So the position has a $600 loss.

You can also compute each leg at $75 and add them:

Long 50 call: intrinsic value $25; paid $9 → gain $16 per share = $1,600 gain
Two short 60 calls: intrinsic value $15; received $4 → loss $11 per share per contract
- Total short-call loss = $11 × 100 × 2 = $2,200 loss

Net = $1,600 − $2,200 = $600 loss.

Gain or loss if ABC rises to $55 = $400 gain

Net debit to enter = $100.
At $55, only the long 50 call is in the money by $5 → $500 intrinsic value.
Both short 60 calls are out of the money and expire.

Net gain = $500 − $100 = $400 gain.

Let’s look at a slightly different ratio call spread:

Short 1 MNO Jan 85 call at $16
Long 2 MNO Jan 100 calls at $7

MNO’s market price = $95

Maximum gain?
Maximum loss?
Breakeven(s)?
Gain or loss if MNO falls to $90?
Gain or loss if MNO rises to $120?

Can you figure it out?

(spoiler)

Maximum gain = Unlimited

First, find the net value to establish the position:

Receive $16 for the short call
Pay $14 total for the two long calls ($7 × 2)

Net credit = $2 per share = $200 total.

This position can profit in two ways:

MNO finishes below $85

All options are out of the money and expire.
The investor keeps the $200 credit.

MNO rises well above $100

Above $100, all options are in the money.
The short 85 call’s losses offset the gains on one of the long 100 calls.
The extra long 100 call continues to gain as MNO rises.

That extra long call creates unlimited gain potential.

Maximum loss = $1,300

Maximum loss occurs at $100 at expiration:

Short 85 call is $15 in the money ($100 − $85) → $1,500 intrinsic value loss.
Both long 100 calls are at the money → no intrinsic value.
Net the initial $2 credit against the $15 intrinsic value loss:

Net loss = $13 per share ($15 − $2) = $1,300 total.

Breakevens = $87 and $113

This strategy has two breakeven points.

Lower breakeven: $87

The position starts with a $200 credit. At $87, the short 85 call is $2 in the money, which is a $200 intrinsic value loss ($2 × 100). That offsets the $200 credit.

*Remember, intrinsic value is a loss for a short contract.

Upper breakeven: $113

We found the maximum loss is $1,300 at $100. Above $100, the extra long 100 call produces gains while the other long call and the short call offset each other.

At $113, the extra long call is $13 in the money ($113 − $100), which is $1,300 of intrinsic value. That offsets the $1,300 maximum loss.

Gain or loss if MNO falls to $90 = $300 loss

Initial credit = $200.
At $90, only the short 85 call is in the money by $5 → $500 intrinsic value loss.
Both long 100 calls are out of the money and expire.

Net = $500 loss − $200 credit = $300 loss.

Gain or loss if MNO rises to $120 = $700 gain

Using the upper breakeven:

At $113, gain/loss is $0.
From $113 to $120 is $7 higher.
The extra long call gains $7 per share = $700 gain.

You can also compute each leg at $120 and add them:

Short 85 call: intrinsic value $35; received $16 → net loss $19 per share = $1,900 loss
Two long 100 calls: intrinsic value $20; paid $7 → net gain $13 per share per contract
- Total long-call gain = $13 × 100 × 2 = $2,600 gain

Net = $2,600 − $1,900 = $700 gain.

Key points

Ratio strategies

Options-based strategy with a “heavy” side

Ratio call spreads

Long call(s) paired with short call(s)
One side is “heavy” (more contracts than the other)
Investor’s market sentiment is determined by “heavy” side
Unlimited risk potential if the short call(s) is/are naked

Ratio call spreads

For example, assume an investor establishes the following positions:

Long 1 ABC Jan 50 call at $9
Short 2 ABC Jan 60 calls at $4

ABC’s market price = $51

That uncovered short call drives the risk. A short naked call has unlimited loss potential: the higher ABC’s market price rises, the larger the loss on the uncovered call.

Let’s work through some practice questions:

Long 1 ABC Jan 50 call at $9
Short 2 ABC Jan 60 calls at $4

ABC’s market price = $51

Maximum gain?
Maximum loss?
Breakeven(s)?
Gain or loss if ABC rises to $75?
Gain or loss if ABC rises to $55?

Can you figure it out?

(spoiler)

Maximum gain = $900

Start by finding the net cost (or credit) to establish the position:

Pay $9 for the long call
Receive $8 total for the two short calls ($4 × 2)

Net cost = $1 per share ($9 − $8) = $100 total ($1 × 100 shares).

Maximum gain occurs at $60 at expiration:

The long 50 call is $10 in the money (worth $10 intrinsic value).
Both short 60 calls are at the money (no intrinsic value) and expire.

The long call can be exercised to buy at $50 and sell at $60, producing $10 per share = $1,000.

Net maximum gain = $1,000 − $100 = $900.

Maximum loss = Unlimited

One of the short calls is uncovered. If ABC rises above $60, all three calls are in the money:

The long call offsets the loss on one short call.
The other short call remains naked and keeps losing as ABC rises.

Because a naked short call can lose without limit, the maximum loss is unlimited.

Breakevens = $51 and $69

This ratio call spread has two breakeven points.

Lower breakeven: $51

The position cost is $1 per share ($100 total). At $51, the long 50 call has $1 of intrinsic value ($51 − $50), which is $100 total. That offsets the $100 net debit.

Upper breakeven: $69

We already found the maximum gain is $900 at $60. Above $60, the uncovered short call creates additional losses (the long call and one short call offset each other).

At $69, the uncovered short 60 call is $9 in the money ($69 − $60), which is a $900 loss ($9 × 100). That offsets the $900 maximum gain.

Gain or loss if ABC rises to $75 = $600 loss

One approach is to use the upper breakeven:

At $69, gain/loss is $0.
From $69 to $75 is $6 higher.
The uncovered short call loses an additional $6 per share = $600.

So the position has a $600 loss.

You can also compute each leg at $75 and add them:

Long 50 call: intrinsic value $25; paid $9 → gain $16 per share = $1,600 gain
Two short 60 calls: intrinsic value $15; received $4 → loss $11 per share per contract
- Total short-call loss = $11 × 100 × 2 = $2,200 loss

Net = $1,600 − $2,200 = $600 loss.

Gain or loss if ABC rises to $55 = $400 gain

Net debit to enter = $100.
At $55, only the long 50 call is in the money by $5 → $500 intrinsic value.
Both short 60 calls are out of the money and expire.

Net gain = $500 − $100 = $400 gain.

Let’s look at a slightly different ratio call spread:

Short 1 MNO Jan 85 call at $16
Long 2 MNO Jan 100 calls at $7

MNO’s market price = $95

Maximum gain?
Maximum loss?
Breakeven(s)?
Gain or loss if MNO falls to $90?
Gain or loss if MNO rises to $120?

Can you figure it out?

(spoiler)

Maximum gain = Unlimited

First, find the net value to establish the position:

Receive $16 for the short call
Pay $14 total for the two long calls ($7 × 2)

Net credit = $2 per share = $200 total.

This position can profit in two ways:

MNO finishes below $85

All options are out of the money and expire.
The investor keeps the $200 credit.

MNO rises well above $100

Above $100, all options are in the money.
The short 85 call’s losses offset the gains on one of the long 100 calls.
The extra long 100 call continues to gain as MNO rises.

That extra long call creates unlimited gain potential.

Maximum loss = $1,300

Maximum loss occurs at $100 at expiration:

Short 85 call is $15 in the money ($100 − $85) → $1,500 intrinsic value loss.
Both long 100 calls are at the money → no intrinsic value.
Net the initial $2 credit against the $15 intrinsic value loss:

Net loss = $13 per share ($15 − $2) = $1,300 total.

Breakevens = $87 and $113

This strategy has two breakeven points.

Lower breakeven: $87

The position starts with a $200 credit. At $87, the short 85 call is $2 in the money, which is a $200 intrinsic value loss ($2 × 100). That offsets the $200 credit.

*Remember, intrinsic value is a loss for a short contract.

Upper breakeven: $113

We found the maximum loss is $1,300 at $100. Above $100, the extra long 100 call produces gains while the other long call and the short call offset each other.

At $113, the extra long call is $13 in the money ($113 − $100), which is $1,300 of intrinsic value. That offsets the $1,300 maximum loss.

Gain or loss if MNO falls to $90 = $300 loss

Initial credit = $200.
At $90, only the short 85 call is in the money by $5 → $500 intrinsic value loss.
Both long 100 calls are out of the money and expire.

Net = $500 loss − $200 credit = $300 loss.

Gain or loss if MNO rises to $120 = $700 gain

Using the upper breakeven:

At $113, gain/loss is $0.
From $113 to $120 is $7 higher.
The extra long call gains $7 per share = $700 gain.

You can also compute each leg at $120 and add them:

Short 85 call: intrinsic value $35; received $16 → net loss $19 per share = $1,900 loss
Two long 100 calls: intrinsic value $20; paid $7 → net gain $13 per share per contract
- Total long-call gain = $13 × 100 × 2 = $2,600 gain

Net = $2,600 − $1,900 = $700 gain.

Key points

Ratio strategies

Options-based strategy with a “heavy” side

Ratio call spreads

Long call(s) paired with short call(s)
One side is “heavy” (more contracts than the other)
Investor’s market sentiment is determined by “heavy” side
Unlimited risk potential if the short call(s) is/are naked