Call Ratio Spread Strategy

The Call Ratio Spread is an advanced options strategy that involves buying a certain number of call options at a lower strike price and selling a greater number of call options at a higher strike price — typically in a 1:2 ratio. This setup allows traders to profit from moderate upward movement in the underlying asset while managing cost and risk. It’s best suited for neutral to slightly bullish market conditions.

Structure

• Buy 1 in-the-money or at-the-money call
• Sell 2 out-of-the-money calls (same expiration)
• All options share the same expiration date

Profit & Loss Profile

• Max Profit: Occurs if the stock closes at the short call strike at expiration
• Max Loss: Unlimited if the stock rises significantly above the short strike
• Breakeven: Depends on net credit/debit and strike width
• Entry: Can be for a net credit or debit depending on option pricing

Ideal Market Conditions

• Neutral to slightly bullish outlook
• Expecting low volatility or range-bound movement
• Best when implied volatility is high at entry and expected to decline

Example

A stock is trading at $50. You:

• Buy 1 call at $50 strike for $3
• Sell 2 calls at $55 strike for $2 each

Net credit = $1. Max profit occurs if the stock closes at $55. If it rises above $55, losses begin due to the uncovered short call.

Risks & Considerations

• Unlimited upside risk if the stock rallies past short strikes
• Requires active monitoring and potential adjustments
• Assignment risk on short calls
• Time decay and volatility shifts impact profitability