A Ratio Spread involves buying a certain number of options at one strike and selling a greater number at another strike, creating an asymmetric position. The most common form is a Call Ratio Spread buying one ATM call and selling two OTM calls. The strategy benefits from a modest upward move in the underlying and profits from time decay on the extra short option. It is typically structured to be either cost-neutral or a net credit. The risk is on the upside if the underlying rallies sharply past the short strike, as the extra sold option is uncovered (naked). Ratio spreads are used by experienced options traders seeking to express a directional view while financing the long leg through the additional short position.
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