Expect a stock price to remain relatively stable? Consider taking in a little premium by writing Calls or Puts to profit, while limiting your risk by hedging yourself with a few long contracts. Ratio spreads should be done with either all Calls or all Puts.

The expiration months should be the same, and should reflect how long you expect the price of the underlying stock to be stable. These spreads are like long vertical spreads with extra short options to increase profits.

Relative profits can be greater, but these extra short contracts are uncovered.

If the stock moves against you, you're exposed to increased risk on the upside for a Call spread and downside for a Put spread. Depending on the expiration month you choose, and the strike prices relationship i. You should see your maximum profit if the underlying stock closes exactly at the written options strike price at expiration. Upside unlimited; downside limited to net debit paid for the spread As the underlying stock price goes above the short calls strike price, your extra short contract s expose you to unlimited potential loss.

If the stock closes below both strike prices, all contracts will expire out-of-the-money, should be worthless, and your loss is limited to the net debit paid for the spread. Under the same circumstances, if you put the spread on for a net credit and all options expire worthless, you keep this credit and the position makes a profit.

Downside substantial; upside limited to net debit paid for the spread As the underlying stock drops below the short puts strike price, your extra short contract s expose you to potentially substantial losses.

If the stock closes above both strike prices, all contracts will expire out-of-the-money, should be worthless, and your loss is limited to the net debit paid for the spread.

Put Ratio Spread Strategy | Options Trading at optionsXpress

If debit paid for spread: Your primary risk comes from the upside, and a rising stock price. Remember, you're short at least one naked call contract a risky situation. Background of an Option. What is an Option?

Finding an Option to Trade. Reading an Option Quote Screen.

Placing an Option Order. Options Level 1 Quiz. Options Level 2 Quiz. A Form of Hedging.

Options Level 3 Quiz. Time Diagonal Put Spread. Options Level 4 Quiz.

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Ratio Spreads Expect a stock price to remain relatively stable? Ratio Call Spread This is also referred to as the Call Back Spread Sell call with lower strike price Buy 2 or more calls with higher strike price. Sell 1 put with higher strike price Buy 2 or more puts with lower strike price. Additional Resources Glossary Toolbox XGuides Xpress Method Xpresso.

Options level 1 Intro to Options Background of an Option What is an Option? Option Greeks Historical Volatility Theoretical Value Implied Volatility Black-Scholes Model Options Level 2 Quiz. Option Spreads Bull Call Spreads Bear Put Spreads Bull Put Spreads Bear Call Spreads Ratio Spreads Calendars Time Diagonal Put Spread Straddles and Strangles Long Straddle Short Straddle Long Strangle Short Strangle Butterflies Condors Reversals Conversions Index Options Options Level 4 Quiz.