A Ratio Spread is a versatile options strategy in which you buy call or put options and sell a larger quantity further from the money. This strategy allows you to create a customized risk/reward profile that fits your view of the asset. On Option Samurai, you can scan the market for call ratio spreads and put ratio spreads.
Our Ratio spread scanner allows you to pick any ratio and scan all possible variations to find the optimal trade that fits your view. Our flexible scanner and customizable filters will enable you to find trades others can’t.
Call and Put Ratio Spreads
In a call ratio spread, you buy calls at one strike price and sell more calls at a higher strike price. Similarly, in a put ratio spread, you buy puts at one strike price and sell more puts at a lower strike price.
What makes the ratio spread particularly powerful is its flexibility. By adjusting the ratio of bought to sold options, you can manage the spread’s risk and reward dynamics to suit your market outlook.
How to Control the Ratio
One of the unique features of our platform is the Ratio Controller, which allows you to fine-tune your spread’s structure by adjusting the number of contracts bought and sold:
The ratio controller gives you full control over your position, whether you want a 1:2 spread (buying 1 contract and selling 2), a more aggressive 1:3 spread, or something exotic like an 8:9 ratio.
How to Adjust the Ratio:
Select the put or call ratio spread on our options screener.
By default, you will see the indication: "Ratio: 1/2" - This is a text you can simply click and edit. With this Ratio Controller, you can select the exact ratio you want to trade. You can choose to buy one contract and sell two, three, or more contracts depending on your risk appetite and market outlook.
Click "Run Scan".
You can see the effect of this change if you click a row on the table and see the risk and reward on the P/L chart.
By increasing the number of sold contracts, you can collect a higher premium but increase potential risk. Conversely, reducing the number of sold contracts lowers risk but may also reduce your maximum profit. It’s crucial to balance the trade-off between risk and reward based on your market outlook.
Managing Credit/Debit: Bid/Ask/Mid Filters
Another key aspect of optimizing your ratio spread is managing the credit or debit you receive from the trade. This is where the Bid/Ask/Mid filters come into play:
Here is what you should know:
Bid: If you're looking to place a conservative trade and want to enter at the worst possible price for you.
Ask: This is the best possible outcome using the prices in your favor. This is the theoretical price.
Mid: For traders looking to find a balanced entry, the mid filter helps you target the middle ground between the bid and ask prices. Often, the price might be a bit worse than Mid, but it’s a good starting point to negotiate with the Market Makers.
The credit or debit you receive impacts your breakeven points and risk/reward profile. If you receive credit, you will only have one breakeven point.
Sold/Bought Call Delta: Control the Spread Width
In a ratio spread, controlling the spread’s width is crucial for managing risk and potential profit. This is often done by adjusting the strikes of the bought and sold options using Call or Put Delta as a guide.
Intuitively, this is how it works:
Call/Put Delta: A delta closer to 50 means the option is near-the-money, while a delta near 0 or 100 is deep out-of-the-money or deep in-the-money, respectively. By adjusting the delta of the long and short options, you can either widen or narrow the spread.
A wider spread increases the range of price movement where your trade could be profitable, but it also reduces the credit or forces the trade to be further from the money.
A narrower spread will increase the credit and allow the trade to start closer to the money, but it will also increase the risk of the asset blowing past your sold strike.
This feature can make the spread more manageable. If you're looking to set up a trade with lower risk, focus on selling far options, which will give you more room for error.
Controlling Breakeven Points
Breakeven points are the points where the position ‘crosses the zero line’ and becomes profitable (where before it was losing) or becomes losing (where before it was profitable).
In Ratio spreads, there could be two breakeven points if the trade was done for a debit or one breakeven point if it was done for a credit.
Upper Breakeven: This filter controls the higher breakeven point in the trade. In Call ratio spreads, there’s always an upper breakeven point. But in Put ratio spreads, there’s only an upper breakeven if the trade was done on debit.
Lower Breakeven: This filter controls the lower breakeven point in the trade. In Put ratio spreads, there’s always a lower breakeven point. But in Call ratio spreads, there’s only a lower breakeven if the trade was done on debit.
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