A ratio spread involves buying fewer options than you sell, creating a position where you collect net credit in exchange for taking on additional directional risk beyond a certain point.

Standard 1×2 Call Ratio Spread — Construction: - Buy 1 ATM call (e.g., $100 strike, premium = $3.50) - Sell 2 OTM calls (e.g., $110 strike, premium = $1.40 each) - Net credit collected: 2 × $1.40 $3.50 = $0.70 (actually a net debit of $0.70 in this example; adjust strikes for a credit)

With strikes closer: Buy 1 × $100 call at $4.00, sell 2 × $108 calls at $2.20 each: - Net credit = 2 × $2.20 $4.00 = $0.40 credit

Payoff at Expiration: | Stock Price | P&L | |---|---| | Below $100 | Keep $0.40 credit | | $100–$108 | Credit + intrinsic on long call | | $108 (max profit) | +$8.40 = $8 intrinsic + $0.40 credit | | Above $108 | Profit erodes; short extra call kicks in | | Above $116.40 | Net loss begins (break-even = $108 + $8.40) | | $130 | Loss = $13.60 (unlimited if not managed) |

Put Ratio Spread mirrors this on the downside: buy 1 ATM put, sell 2 OTM puts. Ideal when you expect a moderate decline but not a crash.