Call Ratio Spread
Buy one call and sell two higher calls. A neutral-to-bullish strategy that profits from moderate upside moves but has risk above the short strikes.
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What is a Call Ratio Spread?
A call ratio spread involves buying one call at a lower strike and selling two calls at a higher strike, all at the same expiration. This creates an unbalanced position. You have a bull call spread embedded in the trade (the long call plus one of the short calls), and then an extra naked short call on top.
The trade is typically entered for a small credit or near even. It profits when the stock rises moderately to the short strike. The danger is a big rally past the upper breakeven, where the extra naked call creates unlimited loss potential.
How to Set It Up
- Buy 1 call at a lower strike
- Sell 2 calls at a higher strike
- Same expiration for all legs
- Strike selection: Buy the ATM or slightly OTM call. Sell two calls 5-10 points higher.
- Credit or debit: The trade can often be entered for a small credit if the spacing is right. The further apart the strikes, the more likely you pay a small debit.
The 1:2 ratio is the standard, but some traders use 2:3 or other ratios for different risk profiles.
When to Use This Strategy
Use a call ratio spread when:
- You are moderately bullish and think the stock will rise to a specific level but not beyond
- You want a low-cost or free entry to a directional trade
- You are comfortable with upside risk above a certain point
- IV is elevated, making the short calls premium-rich
- You have a clear resistance level where you expect the stock to stall
This strategy works best when you have strong conviction that the stock will not rally too far. The extra short call provides the income that makes the trade cheap, but it also creates the risk.
Example Trade
Stock XYZ is trading at $100. You expect it to rise to $105 but not much higher.
- Buy 1 XYZ $100 call for $3.50
- Sell 2 XYZ $105 calls for $1.80 each ($3.60 total)
- Net credit: $3.60 - $3.50 = $0.10 ($10 collected)
If XYZ stays at $100: All calls expire worthless. You keep the $10 credit.
If XYZ goes to $105: The $100 call is worth $5. Both $105 calls expire worthless. Profit: $500 + $10 = $510. Maximum profit.
If XYZ goes to $110: The $100 call is worth $10. Both $105 calls are worth $5 each ($10 total). Net: $10 - $10 + $0.10 = $10 profit.
If XYZ goes to $116: The $100 call is worth $16. Both $105 calls are worth $11 each ($22 total). Net: $16 - $22 + $0.10 = -$590 loss. Losses accelerate above this point.
Risk and Reward
- Max profit: (Short strike - long strike + net credit) x 100. $510 in our example. Achieved at the short strike at expiration.
- Max loss: Unlimited above the upper breakeven because you have an extra naked short call. Below the long strike, your loss is limited to any net debit (or you keep the credit).
- Breakeven: Two points. On the downside, the long strike plus any debit. On the upside, the short strike plus the max profit per share ($105 + $5.10 = $110.10).
The risk profile is asymmetric: great returns for moderate upside, devastating losses for a big rally.
Tips and Common Mistakes
- Have a hard stop on the upside. If the stock blows through the short strike, close the trade.
- This trade has naked call risk. You need the margin and approval level to sell naked calls.
- Consider converting to a butterfly if the stock approaches the short strike. Buy one more call above to cap risk.
- Works best with a clear resistance level. If you have no idea where the stock might stop, do not use this strategy.
Related Strategies
- Call Backspread — the opposite ratio (sell 1, buy 2) for unlimited upside
- Bull Call Spread — the defined-risk component embedded in this trade
- Long Call Butterfly — add a third long call to cap upside risk
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