How to Use a 2:1 Ratio Spread Option and the Benefits Thereof

Firstly, a call option is a contract that gives the owner the option, but not the requirement, to buy a specific underlying stock at a predetermined price (known as the “strike price”) within a certain time period (or “expiration”).

A ratio spread is a neutral options strategy in which an investor simultaneously holds an unequal number of long and short or written options. The name comes from the trade structure, where the number of short positions to long positions has a specific ratio. The most common ratio is two to one, where there are twice as many short positions as long.

Call ratio backspread strategies are designed to benefit from increases in market volatility. Investors typically employ them when they believe financial markets are poised to move higher. By simultaneously buying and selling call options, traders can hedge their downside risk while benefiting from the upside as markets gain.

Note that a loss occurs if the price makes a large move to the upside because the trader has sold more positions than they have long.

These strategies can be used on a standalone basis to “go long” in the market. Alternatively, they can be used as part of a larger or more complex investing position.

Personally, I know investors that have done 2-1 spread, and they’ve been successful, so it might be a good idea to do it.