A ratio spread combines bought and sold options of the same type (all calls or all puts) and the same expiry, but in unequal numbers. The most common form is the 1x2: buy one option closer to the price and sell two options further out. Because you sell more than you buy, the premium received from the two short options pays for most or all of the long one.
Think of it as a bull call spread with one extra call sold. The extra sale lowers the cost, and in return it removes the cap on the risk above the sold strike.
Call ratio spread = buy 1 lower-strike call + sell 2 higher-strike calls
A worked example: NIFTY 1x2 call ratio spread
NIFTY is at 25,000 with about a week to expiry. You think it may drift up but not run away. You buy one 25,000 call at ₹180 and sell two 25,300 calls at ₹70 each (₹140 received). Net cost: ₹40 debit.
At expiry the payoff has three zones:
- Below 25,000, all calls expire worthless and you lose the ₹40 debit. That is the whole downside risk.
- Between 25,000 and 25,300, the bought call gains point for point. The best result is at 25,300: the long call is worth 300, both short calls are worthless, and the profit is ₹260.
- Above 25,300, the two short calls lose two points for every point NIFTY rises, while the long call gains one. Net, you lose one point per point, and beyond the upper break-even the loss keeps growing without limit.
| NIFTY at expiry | Long 25,000 call | Two short 25,300 calls | Profit per unit | Per lot of 75 |
|---|---|---|---|---|
| 24,800 | 0 | 0 | −40 | −₹3,000 |
| 25,040 | 40 | 0 | 0 | ₹0 |
| 25,200 | 200 | 0 | +160 | +₹12,000 |
| 25,300 | 300 | 0 | +260 | +₹19,500 |
| 25,450 | 450 | −300 | +110 | +₹8,250 |
| 25,560 | 560 | −520 | 0 | ₹0 |
| 25,800 | 800 | −1,000 | −240 | −₹18,000 |
| 26,000 | 1,000 | −1,400 | −440 | −₹33,000 |
The lot size of 75 is only for arithmetic; check the current figure on NSE. The break-evens are 25,040 and 25,560. The upper one is worked out as the sold strike plus the maximum profit: 25,300 + 260.
Upper break-even = sold strike + (sold strike − bought strike − net debit)
The put ratio spread
The mirror image uses puts: buy one put near the price and sell two further below. With NIFTY at 25,000, you might buy the 25,000 put at ₹170 and sell two 24,700 puts at ₹65 each, a ₹40 debit. It earns most if NIFTY ends at 24,700 and has open-ended risk below the lower break-even (24,700 − 260 = 24,440). Put ratio spreads often get a better price than call ratio spreads in Indian index options, because out-of-the-money puts usually carry higher implied volatility than calls the same distance away. That pattern is called the volatility skew. The other side of that coin: the risk sits exactly where markets fall fastest, in a crash.
Picking the strikes with the option chain
The live NIFTY option chain below shows the premiums you would combine:
Look for a sold strike roughly where you expect the price to finish, and check that two of its premium come close to one premium of your bought strike. If two short options cost more than the long one, the spread opens for a credit, and you keep that credit even if the price falls.
A sensible distance between strikes often relates to the expected move. The box below shows the range NIFTY's ATM straddle implies for this expiry:
If the sold strike sits near the edge of that range, you are betting that NIFTY rises about as much as the market expects and no more. If the upper break-even sits well inside the range, a normal-sized move could already put the trade into loss.
How it behaves before expiry: the Greeks
The expiry table hides an important detail. Before expiry, a ratio spread is short gamma, meaning that as the price rises toward and past the sold strike, the position turns from bullish to bearish quickly. Gamma measures that change. A sharp rally early in the week can show a loss on screen even while the price is still below the sold strike, because the two short calls have gained more than the long call.
The position is also short vega overall when the sold options outnumber the bought: a jump in implied volatility hurts it. And it is long theta, gaining from time passing if the price stays in the profit zone. That mix is why many traders treat ratio spreads as a short-option trade with a built-in head start rather than as a cheap long position.
The backspread: the reverse ratio
Flip the quantities and you get a ratio backspread: sell one option near the price and buy two further out. A call backspread on NIFTY might sell one 25,000 call and buy two 25,300 calls, often for a small credit. It loses most if NIFTY finishes at 25,300 and gains without limit on a big rally. Backspreads are long gamma and long vega: they suit a view that a big move is coming, the opposite of the ratio spread.
Managing the risk
- Exit rule on the short side. Decide in advance the price at which you close or adjust, often a little above the sold strike for a call ratio. Waiting until the break-even means you have already given back all the profit zone.
- Buy a far wing. Buying one more call well above the sold strike turns the 1x2 into a broken-wing butterfly, capping the upside risk for a small extra cost. The butterfly guide shows that structure.
- Size by the open side. Margin for ratio spreads reflects the extra short option. Check the current requirement with your broker, and size the trade on the loss at a big move, not on the debit.
- Mind events. A surprise can carry the price straight through the profit zone into the open-ended area within minutes.
Common mistakes
- Seeing only the low cost. A ratio spread opened for zero still carries the risk of a naked short option.
- Using it on stocks before results. A single stock can gap far beyond the upper break-even overnight.
- Ignoring liquidity at the sold strike. You need to buy back twice as many options there in a hurry; wide bid-ask spreads make that expensive.
- Calling it a hedge. It is a directional bet with a specific target, not protection.
Build any ratio in the NIFTY strategy builder before trading it, and look hard at the right-hand side of the payoff line, where it keeps falling.