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The ratio spread

Buy one option and sell two further out, in the same expiry.
It looks like a spread with a bonus. It is a spread with a naked option attached.

What it is

Three contracts, two strikes, one expiry.
You buy one option nearer the money.
You sell two further out.
One of those two is covered by the leg you bought. The other one is not covered by anything.

What you are actually agreeing to

You are usually paid to open it, or it costs very little.
There is a zone where it pays well — between the two strikes.
Beyond the far strike, the uncovered leg takes over and the position becomes a short option.
That means no cap on the loss in that direction.

The trade, written out

Everything above is the idea. This is the position — the lines you would actually send to a broker.

Order ticket

Leg	Action	Qty	Expiry	DTE	Strike	Delta	Price
1	Buy to open	+1	16 Oct 26	45	100 Call	+0.54 (54Δ)	$3.74
2	Sell to open	-2	16 Oct 26	45	104 Call	-0.73 (73Δ)	$2.09
Net	Credit	1 position	16 Oct 26	45	—	-0.19	$0.43

SELL -1 RATIO XYZ 16 OCT 26 100/104 CALL @ 0.43 CREDIT

Reading it back

One bought, two sold. The imbalance is the structure.
The second short leg pays for the long one, which is why the ticket can show a credit.
The ticket cannot show a maximum loss, because past the short strike there is not one.
Read the net delta — it tells you which way this leans today, and it will not stay there.

The argument

Bull

makes the claim

There is a sweet spot here that no other structure gives you: a peak of profit at the short strike, paid for by the extra leg, often for a credit. If the stock drifts to my strike I have the best outcome available.

Bear

doubts it

You have described everything except the part that matters. Past that strike you are short a naked option and the position keeps getting worse with no end. You built a trade that is at its best right next to the place it is at its worst.

Ferret

settles it

That is the interesting feature and it is testable: the maximum profit and the beginning of the unlimited zone are the same price. How often the stock finishes just past it, rather than just short of it, decides the whole thing.

The shape of it

The ratio spread on XYZ at $100 · 25% volatility · 4% rate · 45 days. Priced from the model, not written by hand.

	At expiry
Credit taken in	$43
Maximum profit	$443
Maximum loss	unlimited
Breakeven	$108.43

A peak at the short strike, then a line that keeps falling.
Maximum profit is at the short strike and the table gives it.
Maximum loss reads “unlimited” — past the short strike the uncovered leg dominates and nothing stops it.
The best and the worst outcomes are neighbours on the price axis. That is unusual and it is worth staring at.

One side of this structure has no bound, so the table says unlimited rather than whatever number the edge of the chart happened to reach. That is the honest answer and it is the one that should change how you size it.

Where you actually enter

The chart above is the shape at expiry. It puts the bend right next to the money, which makes the trade look like it is already on the edge. It is not — here is the day you open it.

The same structure set up at 30Δ · 45 days · credit $17. The shaded band is the room between the stock and the strike you sold.

The same price, two different days

	On day one	At expiry
Stock at $106 (the strike you sold)	$-145	$417
Stock unchanged at $100	$0	$17

You enter below the peak, in the zone that improves as the stock drifts your way.
The day-one line is much flatter than the expiry shape.
The peak only forms near expiry, which means the attractive part of this structure exists only at the end.
And the dangerous part exists the whole time.

Different ways to set it up

The dials are where the short strikes sit and how far the long leg is from them. The gap between the two is what decides how big the peak is.

Same delta, four tenors

Days	Short strike	Away from spot	Credit	Max loss	Risk : reward
7	102	-2.0%	$137	unlimited	—
21	104	-4.0%	$50	unlimited	—
45	106	-6.0%	$17	unlimited	—
90	109	-9.0%	$93	unlimited	—

Short-dated ratios have a sharp peak and little time to reach it.
Longer ones are flat for most of their life.
The uncovered leg is exposed for the whole tenor either way, which is the asymmetry that matters.

Same tenor, three deltas

Delta	Short strike	Away from spot	Credit	Max loss	Risk : reward
40Δ	103	-3.0%	$60	unlimited	—
25Δ	107	-7.0%	$9	unlimited	—
15Δ	110	-10.0%	$6	unlimited	—

Closer-in short strikes collect more and put the cliff nearer the money.
Further out is safer and often not worth doing.
There is no risk-to-reward column here, because there is no maximum loss to compute one from.

A ratio spread pays best at exactly the price where its risk begins.

What the Greeks are doing

Four questions about the same position, and a fifth that barely applies here.
Every structure answers them differently, which is why this site never writes a general page about the Greeks.

Days left	Delta	Gamma	Theta / day	Vega	Rho
45	-18.9	-4.04	$+3.66	$-12.44	$-2.28
21	-3.1	-4.57	$+3.95	$-6.58	$-0.21
7	+24.2	-1.16	$+0.74	$-0.56	$+0.45

The position at entry — stock $100 · 25% volatility. Per contract, from the model.

Delta — which way you need the stock to go

It changes sign as the stock moves through the strikes.
That is the defining feature. A ratio spread is bullish, then neutral, then increasingly bearish exposure, without you doing anything.

Theta — what time does to you

Positive overall, because you sold more than you bought.
It is at its most positive right around the short strike, which is also where the risk is.

Vega — what a change in fear does to you

Net short volatility.
A volatility spike hurts most in the zone past the short strike, where the uncovered leg lives.

Gamma — how fast your delta turns against you

Negative and uncapped past the short strike.
The extra short leg is the reason this structure moves faster than its size suggests.

Rho — what a change in interest rates does to you

Small at this tenor.
One row.

Theta and gamma are one thing

This is the part that decides whether the strategy works, and it is almost never put plainly.

You cannot be paid theta without being short gamma. They are not two features of the trade. They are the rent and the risk on one lease.

The same position, three points in its life

Nothing about the position changes.
The stock sits still at $100 throughout.
Only the days left move.

Days left	Delta	Gamma	Theta / day	Vega	Rho
45	-18.9	-4.04	$+3.66	$-12.44	$-2.28
21	-3.1	-4.57	$+3.95	$-6.58	$-0.21
7	+24.2	-1.16	$+0.74	$-0.56	$+0.45

Now move the stock to $103.00

Same three dates, same ratio.
Now with the stock right at the short strikes — the peak, and the edge of the cliff.

Days left	Delta	Gamma	Theta / day	Vega	Rho
45	-32.3	-4.81	$+4.72	$-15.74	$-3.96
21	-21.3	-7.34	$+6.91	$-11.21	$-1.27
7	+0.4	-14.23	$+12.94	$-7.24	$-0.02

Gamma goes from -4.81 to -14.23.
Theta goes from $+4.72 a day to $+12.94.
Both climb, and neither is available without the other.
Delta now moves roughly 3 times as far for every dollar the stock travels.

Which is what DTE actually sets

Shorten the tenor and the peak sharpens along with everything under it.
The uncovered leg’s gamma is what actually decides this trade, and it steepens like every other short option here.
The difference is that on this structure it steepens at the exact price you were hoping to finish at.

The trap

The trap is the word “spread”.

One of the two options you sold is covered. The other one is naked, and the position behaves like it.

Brokers list it as a spread and margin it accordingly.
Past the short strike it is a naked short option, with all of that risk and none of the defined-risk comfort.
The credit at entry makes it feel like a free position, the same way a broken wing does.
It is not, and the table in section four says “unlimited” for a reason.

Why it matters

A retail account sized as though this were a defined-risk spread is sized wrong by an amount that cannot be calculated in advance.
Whether a ratio spread makes sense for a retail account at all is a real question, and it is on the list to test rather than to assert.

How this shows up in our tests — pending. No result has been published on this structure yet.