
Start Here
Platform

Tour
Bots 101How it worksLive demo
Tools
Automated tradingOptions backtestingWatchlist scannerPrivate community
Use cases
New investorsStock tradersActive tradersPassive investorsSwing tradersAlgorithmic traders

Templates
By trade type
Stock trading botsOptions trading bots
By strategy type
Bullish options strategiesNeutral options strategiesBearish options strategiesHedging strategies
By style
Active and high frequency botsEvent-based botsTrend trading botsMomentum trading botsStatistic and probability-based botsTechnical analysis botsEarnings strategy bots

Integrations

Pricing
Education

Courses
Overview
By experience
Beginner
What is an options contract?Stock trading vs. options tradingOptions contract specificsCall vs. put options basicsBuying options vs. selling optionsOptions profit and loss diagramsOptions pricing tablesOption moneyness (ITM, OTM, and ATM)Options pricing and the "Greeks"Options expiration and assignmentWhat's our "edge" trading options?Single vs. multi-leg options strategiesSmall account options strategies
Intermediate
Fearless, confident options tradingHistorical volatility vs. implied volatilityPredicting market movesTrade size and capital reservesPortfolio balance and beta weightingHow to choose the best options strategyHow far out to place trades?Strike price anchoring with probabilitiesTips on getting your trades filledAdvanced and contingent orders7 step options trade entry checklist
Advanced
Developing a daily trading routineHow to avoid "Black Swan" eventsAdjusting and hedging option tradesExiting options trades automaticallyOptions strategies we don't adjust (and why)Big picture adjustment strategyWhen to adjust or notAdjusting straddles and stranglesAdjusting credit spreads, iron condors, and calendarsSmarter stop-loss ordersBuilding a diversified options portfolioRolling options trades for duration and premiumOptions expiration week position checklistDealing with stock assignment and dividendsHow to free up trading margin and cash
By subject
Options basics
Why options vs. stocks?What is an options contract?Smart use of leverageOption strike priceOption premiumOption expirationOption contract multiplierProfit and loss diagramsLong call option explainedShort call option explainedLong put option explainedShort put option explainedATM, ITM, and OTM optionsCash vs. margin basicsHigh probability trading definedHow to buy a call optionHow to buy a put optionSingle-leg vs. multi-legWhat is the VIX?Is fundamental analysis dead?
Entering and exiting trades
Game of numbers7 step entry checklistStrong liquidity examplesPicking the next directionScanning for tradesOption pricing table basicsSetting up your trade tabPinning your probability of profitUsing delta for probabilitiesBuy to open vs sell to openBuy to close vs sell to closeMarket, limit, stop loss orders5 types of contingent ordersLimit ordersMarket ordersLimit on close ordersMarket on close ordersAdvanced contingent ordersTaking profits before expirationMechanics of rollingConsider future events
Options expiration
Options expiration explainedWhat is the Options Clearing Corporation (OCC)?Physical vs. cash settlement optionsAmerican vs. European style optionsWeekly options expirationWeekly expiration tags/codesOptions assignment processOptions exercise processTrading timeline (duration)
Bullish options strategies
Bull put spreadBull call spreadLong callShort putBull call backspreadPut broken wing butterflyCall calendar spreadPut diagonal spreadCustom naked putCovered callSynthetic long stock
Neutral options strategies
Short straddleLong straddleIron condorsShort strangleLong strangleIron butterflyUnbalanced iron condors
Bearish options strategies
Bear call spreadBear put spreadLong putShort callBear put backspreadCall broken wing butterflyPut calendar spreadCall diagonal spreadCustom naked callCovered putSynthetic short stock
Portfolio managmeent
No guaranteed tradesDon't do something, sit thereAccount size adjustmentsAvoiding stock market overloadStocks, indexes, & ETFsMonitoring positionsCreating automatic alertsIndividual stock betaPortfolio betaBeta weighting your portfolioUncorrelated industries/sectorsSystematic vs. unsystematic riskEfficient portfolio frontierLimiting undefined risk tradesEconomic calendarConcept of legging
Options pricing and volatility
How to find option price quotesUnderstanding the mathIV vs. IV percentileProbability of profit vs. probability of touchOption probability curveBid-ask spread definedIV expected vs. actual moveThe "Greeks"Fatal pricing errorsInverse ETFsOptions parity
Adjusting trades
#1 adjustment for any tradeWhen to adjust a tradeSingle options trade vs. overall portfolioLeveraging the analyze tabCall spread adjustmentsPut spread adjustmentsShort strangle adjustmentsIron condor adjustmentsShort straddle adjustmentsCalendar spread adjustmentsDebit spread adjustmentsButterfly adjustmentsUsing stop lossesDelta hedgingRolling positionsPairs hedging

Strategies
Long callLong putShort callShort putCovered callCovered putProtective putCollar strategyLEAPSBull call debit spreadBear call credit spreadBull put credit spreadBear put debit spreadLong straddleShort straddleLong strangleShort strangleCall calendar spreadPut calendar spreadIron condorReverse iron condorIron butterflyReverse iron butterflyCall butterflyPut butterflyStrapCall diagonal spreadPut diagonal spreadCall ratio spreadPut ratio spreadCall backspreadPut backspreadLong box spreadShort box spreadReversalStock repair

Topics
OverviewAsset allocationAutomated tradingBehavioral financeBrokersCandlestick patternsChart patternsDividendsEconomic indicatorsEquity investmentsExercise & assignmentFinancial analysisFinancial historyFinancial marketsFinancial modelingFinancial theoriesFundamental analysisFuturesInvestment accountsInvestment taxesInvestor biasesMarket holidaysMarket hoursMarket indexesMarket indicatorsMomentum tradingOptionsOptions pricingOptions settlementPortfolio managementRisk managementStocksStock marketTechnical analysisTechnical indicatorsTrading commissionsTrading platformsTrading psychologyTrend trading
Resources

Workshops

Podcast

Blog
Support

Help Center
Overview
Getting started
What is a bot?Creating a botAutomation typesAutomation editorBot dashboardBot positionsBot logTemplates and cloningKey conceptsSafeguards and limitsPower of botsBest practices
Bot automations
What is an automation?Scanner automationsMonitor automationsEvent automationsEditing automationsReusing automationsCopying automationsOrdering automationsUsing custom inputsBot level inputsAutomation statusesAutomations library
Bot actions
DecisionsOpen positionClose positionNotificationsLoop symbolsLoop positionsBot tagsPosition tags
Bot examples
Genesis 1.0 botGenesis 2.0 botGenesis 3.0 botTrend trading with stocks botPortfolio trend trading botTrend trading with options botMultiple moving averages botTechnical swing trading botTrend and momentum botWeekly credit spread botRecurring iron condors botThe "Honey Badger" botHybrid spreads botHigh IV rank iron condor bot
Decision recipes
Comparing underlying symbol priceEvaluating symbol typeComparing underlying symbol propertiesEvaluating underlying symbol performanceEvaluating underlying symbol standard deviationComparing underlying symbol price to an indicatorComparing multiple underlying symbol indicatorsEvaluating underlying symbol implied volatility rankEvaluating underlying symbol earnings reportingEvaluating underlying symbol price probabilityEvaluating underlying symbol probability within rangeEvaluating bot propertiesEvaluating bot available capital for opportunitiesComparing bot position count to position typeComparing bot position count to underlying symbolEvaluating bot position count to position type and underlying symbolEvaluating bot last position activityEvaluating bot last activity with underlying symbolComparing bot active orders statusComparing bot active orders status with underlying symbolEvaluating bot position availabilityEvaluating bot tagsEvaluating opportunity availabilityEvaluating opportunity return expectationsComparing opportunity attributesComparing opportunity leg attributesComparing opportunity bid-ask spreadEvaluating opportunity probabilitiesEvaluating position performanceComparing profit target to trailing valueComparing position time to expirationComparing position durationEvaluating position underlying symbolComparing position propertiesComparing position leg propertiesEvaluating position typeEvaluating position sideComparing underlying symbol price to position legEvaluating position tagsEvaluating underlying symbol indicator propertiesComparing multiple underlying symbol indicator propertiesEvaluating MACD technical indicatorComparing Bollinger Bands to symbol priceEvaluating stochastic technical indicatorComparing VIX propertiesEvaluating market time of the dayEvaluating days of the weekEvaluating bot switches
Position statement
Activity summaryPosition detailsTrade detailsOpened positionsClosed positionsCanceled positionsOverride positionsExpired positionsPosition historyManually open positionManually close positionImport position
Order pricing
SmartPricingFinal price settingsPosition summaryOrder detailsWorking ordersManual override
Bot templates
Creating new templatesUpdating existing templatesDeleting templatesSharing templatesUpdating shared templatesTemplate best practices
Cloning bots
Cloning existing botsCloning from templateCloning from shared template
Troubleshooting
Using bot logsTesting your botsNot enough capital warningDaily position limit warningTotal position limit warningPricing anomaly warningMissing or invalid input errorDaily symbol limit errorExcessive errors failsafeOverlapping strikes failsafePrice exceeds strike-difference errorOptions expiration protocolDuplicate orders errorOptions approval level errorBot event loopsStock splits and corporate actionsSupported browsersSupported countries
Community forum
Community guidelinesCrafting your introductionSending group messagesSending private messagesAttaching bot templatesReceiving bot templatesAttaching automationsReceiving automationsFollowing tradersPosting publiclyEditing posts and messagesSubscribed discussionsUsing bookmarks
Using backtester
Running a new backtestBacktesting results summaryModifying existing backtestsMy backtestsBacktesting research databaseTop backtestsBacktesting errors
Account settings
My profileTrading accountsConnecting to TDAmeritradeConnecting to TradeStationConnecting to TradierIncompatible accountsPassword managementSession timeoutTwo-step authentication
Technical docs
Infrastructure and securityAutomation structureAutomation behaviorData feedsOrder handlingTrade enforcementsBroker rejection errorsBot limitationsProfit and lossFair value pricingDecision propertiesDecision calculationsParameter selectionCalculating probabilityPlatform indicators

Contact
Send FeedbackReport IssueEmail Us
Option AlphaOption Alpha

LoginFree Trial
HomeOptions StrategiesCall Ratio Spread

Call Ratio Spread

A call ratio spread is a multi-leg, neutral strategy with undefined risk and limited profit potential. The strategy looks to take advantage of a drop in volatility, time decay, and little or no movement from the underlying asset.
On this page
Call Ratio Spread Outlook
Call Ratio Spread Setup
Call Ratio Spread Payoff Diagram
Entering a Call Ratio Spread
Exiting a Call Ratio Spread
Time Decay Impact on a Call Ratio Spread
Implied Volatility Impact on a Call Ratio Spread
Adjusting a Call Ratio Spread
Rolling a Call Ratio Spread
Hedging a Call Ratio Spread

Call ratio spreads have three components: one long call purchased in-the-money and two short calls sold at a higher strike price out-of-the-money. The short calls will have the same strike price. All three call options have the same expiration date. Call ratio spreads may be opened for a debit or a credit, depending on the pricing of the options contacts, but call ratio spreads are typically established for a credit. Ideally, the stock price closes at the short call strikes at expiration.

Call Ratio Spread Outlook

Call ratio spreads are market neutral to slightly bullish. The strategy depends on minimal movement from the underlying stock to be profitable. To reach maximum profit potential, the underlying stock price would need to rise in price to close at the short strike prices at expiration. Therefore, a slightly bullish bias is an appropriate outlook for a call ratio spread.

If the call ratio spread is initiated for a credit, the profit potential is the amount of credit received plus the width of the spread between the long and short call options. However, if the underlying stock price falls below the long call option, a profit will still be realized. All options would expire worthless, and the initial credit received would remain. Call ratio spreads have undefined risk if the stock price experiences a significant move higher above the short calls.

A call ratio spread is used when the underlying asset is expected to stay within the range between the two strike prices before expiration.

Call Ratio Spread Setup

A call ratio spread is a bull call debit spread with an additional call sold at the same strike price as the short call in the spread. The bull call spread results in a risk-defined position with limited profit potential. The goal is for the stock price to close at the short strikes at expiration. This results in the short contracts expiring worthless, and the long call could be sold with the maximum intrinsic value.

If the underlying stock price drops below the long strike, all options expire worthless, and the maximum loss is limited to the debit paid or, if a credit was received at trade entry, the credit will be realized as a profit. However, because of the single naked call, if the underlying asset’s stock price exceeds the short call options, the risk is unlimited.

The debit paid or credit collected at entry will depend on how far in-the-money the long call option is and how far out-of-the-money the short call options are relative to the underlying’s stock price.

Call Ratio Spread Payoff Diagram

The call ratio spread payoff diagram illustrates the strategy’s different outcomes based on the underlying stock price. Ideally, the stock price closes at the short strike options at expiration. When a call ratio spread is entered, there is potential for either paying a debit or receiving a credit.

If a credit is received, the amount collected, plus the width of the strike prices, is the maximum potential profit for the position. If a debit is paid, the maximum potential profit is the width of the spread between the short and long strikes, minus the amount paid to enter the position.

Maximum gain and loss are limited if the stock price falls below the long call option. All contracts would expire worthless, and the premium paid or received at entry will remain for a profit or loss. Maximum loss is unlimited if the stock price exceeds the break-even point above the short calls.

For example, if a stock is trading at $52, a call ratio spread could be entered with one long call at $50 and two short calls at $55. Assume a $1.00 credit is received. If the stock closes at $55 the maximum profit potential is realized. $600 is the most that can be made on the trade (the width of the spread, $5, plus the $1.00 credit). The short calls would expire worthless, and the long call can be sold for $5, plus the initial $1.00 credit. If the stock closes at $61 on expiration, the short calls will cost $12 combined to exit, but the long call will be worth $11.

Because the position received $1.00 at trade entry, the position will break-even at expiration if the underlying stock is trading at $61. If the stock closes below $50, all options will expire worthless and the original credit of $100 will remain. If the stock closes above $61, the potential loss is unlimited.

Image of call ratio spread payoff diagram showing max profit, max loss, and break-even points

Entering a Call Ratio Spread

A call ratio spread is a bull call spread with a naked call option sold at the same strike price as the short call option in the spread. Call ratio spreads consist of buying-to-open (BTO) one in-the-money long call option and selling-to-open (STO) two out-of-the-money short call options above the current stock price. All options have the same expiration date.

The amount of contracts is variable, but the most common ratios are 2:1, 3:2, and 3:1. For example, if a stock is trading at $52, a call ratio spread could be entered with one long call at $50 and two short calls at $55.

Entering a call ratio spread may result in receiving a credit or paying a debit. The premium depends on multiple factors, including the width of the spread, how far in-the-money and out-of-the-money the options are, and implied volatility skew. For example, if the marketplace perceives an asset to be very bullish in the future, out-of-the-money options may be more expensive than normal, relative to the in-the-money option.

Exiting a Call Ratio Spread

A call ratio spread will experience its maximum profit potential if the stock price is exactly the same as the short strike options at expiration. In this scenario, or if the stock price closes below the short options and above the long option, the short call options expire worthless. The long call option that is in-the-money may be sold.

If the stock price closes below the long call option, all three options will expire worthless, and no further action will be needed. If the stock price closes above the short call options, all three options will be in-the-money and need to be closed if exercise and assignment are to be avoided.

Time Decay Impact on a Call Ratio Spread

Time decay, or theta, works in the advantage of the call ratio spread. Every day the time value of an options contract decreases, which will help to lower the value of the two short calls. Ideally, the underlying stock experiences minimal movement, and theta will exponentially lose value as the strategy approaches expiration. The decline in time value may allow the investor to purchase the short options contracts for less money than initially sold, while the in-the-money long option will retain its intrinsic value.

Implied Volatility Impact on a Call Ratio Spread

Call ratio spreads benefit from a decrease in the value of implied volatility. Lower implied volatility results in lower option premium prices. Ideally, when a call ratio spread is initiated, implied volatility is higher than where it will be at exit or expiration. Lower implied volatility will help to decrease the value of the two short calls more rapidly. Future volatility, or vega, is uncertain and unpredictable. Still, it is good to know how volatility will affect the pricing of the short options.

Adjusting a Call Ratio Spread

Call ratio spreads may be adjusted before expiration to extend the trade duration or alter the ratio in the spread. If the underlying security rises and challenges the short calls, buying additional long calls to reduce the call spread to a 1:1 ratio caps the position’s risk. Adjustments will most likely come with additional cost to the position, which will increase the risk, lower the profit potential, and narrow the break-even points. Furthermore, because call ratio spreads consist of two short contracts, assignment is a risk any time before expiration.

External factors, such as dividends, may need to be considered when deciding to adjust or close a call ratio spread position. If an investor wants to avoid assignment risk, and/or needs to extend the trade into the future to allow the strategy more time to become profitable, the entire position can be closed and reopened at a future expiration date with the same, or new, strike prices. Typically, if the stock moves above the break-even point, the position is closed instead of adjusted.

Rolling a Call Ratio Spread

Call ratio spreads require the underlying stock price to be at or near a specific price at expiration. If the position is not profitable and an investor wishes to extend the length of the trade, the call ratio spread may be closed and reopened for a future expiration date. Because more time equates to higher options prices, the rollout may cost money and add risk to the position, depending on the initial credit or debit of the spread.

If the stock price has moved above the short call options, there may be an opportunity to close out the existing position and enter a new spread with new strike prices closer to the underlying asset’s current price. However, doing so would not make sense if the new net debit paid exceeds the spread's width, as the position would no longer be profitable.

Hedging a Call Ratio Spread

The most common hedge for a call ratio spread is the purchase of additional long calls to reduce the spread ratio. Purchasing additional long call options converts the call ratio spread into a bull or bear call spread, depending on the outlook for the security at the time of the hedge. Protection from lower movement in the underlying stock is not necessary because the long call option has defined risk to the downside.

However, if an investor wants to protect against a significant increase in the stock price, a long call option may be purchased above the short strikes. This would effectively create a bear call spread and protect against an increase in the underlying stock price. If the stock moves above the break-even point, the position may be closed instead of hedged.

Join 200k+ options traders
Thank you! Please check your email!
Oops! Something went wrong...
Be the first to get notified when we publish new updates.
Was this helpful?
You're the best! Thank you so much for your feedback!
Oops! Somethings wrong with your submission.
On this page
Call Ratio Spread Outlook
Call Ratio Spread Setup
Call Ratio Spread Payoff Diagram
Entering a Call Ratio Spread
Exiting a Call Ratio Spread
Time Decay Impact on a Call Ratio Spread
Implied Volatility Impact on a Call Ratio Spread
Adjusting a Call Ratio Spread
Rolling a Call Ratio Spread
Hedging a Call Ratio Spread
Share this





No-code, fully automated trading for stocks and options.

HomeAboutLegalStatusContact
©2022 Option Alpha. All Rights Reserved. Patent Pending USSN 63/118,547