Ratio Spread
An options strategy in which an investor simultaneously holds an unequal number of long and short positions. A commonly used ratio is two short options for every option purchased.
Investopedia Says:
A ratio spread would be achieved by purchasing one call option with a strike price of $45 and writing two call options with a strike price of $50. This would allow the investor to capture a gain on a small upward move in the underlying stock's price. However, any move past the higher strike price ($50) of the written options will cause this position to lose value. Theoretically, an extremely large increase in the underlying stock's price can cause an unlimited loss to the investor due to the extra short call.
Related Links:
Selling a greater number of options than you buy profits from a decline back to average levels of implied volatility. Ratio Writing: A High-Volatility Options Strategy
Discover how this inverse dynamic has a dual effect on option positions. The Price-Volatility Relationship: Avoiding Negative Surprises
An introduction to the world of options, covering everything from primary concepts to how options work and why you might use them. Options Basics Tutorial
