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 Integrations
Call Ratio
 Pricing Spread
EDUCATION
A call ratio spread is a multi-
 Courses leg, neutral strategy with
 Strategies undefined risk and limited
profit potential. The strategy
Overview
looks to take advantage of a
Long call
drop in volatility, time decay,
Long put
and little or no movement
Short call
from the underlying asset.
Short put
View risk disclosures
Covered call

Covered put
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Protective put

Collar strategy

LEAPS

Bull call debit spread

Call Ratio Strategy highlights
Bear call credit spread

Bull put credit spread Spread Neutral

Bear put debit spread overview outlook
Long straddle Call ratio
spreads
Short straddle Call ratio spreads have three
work best
Long strangle components: one long call when price
purchased in-the-money and trades in a
Short strangle
two short calls sold at a higher defined
Call calendar spread range.
strike price out-of-the-money.
Put calendar spread The short calls will have the
Iron condor same strike price. All three call Option
options have the same seller
Reverse iron condor
expiration date. Call ratio You typically
Iron butterfly receive
spreads may be opened for a
Reverse iron butterfly money to
debit or a credit, depending
enter a call
Call butterfly on the pricing of the options
ratio spread.
 Put butterfly contacts, but call ratio spreads
Strap are typically established for a  Login Strategy
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credit. Ideally, the stock price setup
Call diagonal spread
closes at the short call strikes Call ratio
 Start Here at expiration. spreads
have 3 legs.
PLATFORM
Limited
 Tour Call Ratio Spread profit
 Templates market outlook potential
Call ratio
 Integrations
Call ratio spreads are market spreads
 Pricing have a
neutral to slightly bullish. The
defined
strategy depends on minimal
EDUCATION maximum
movement from the profit.
 Courses underlying stock to be
profitable. To reach maximum
 Strategies Undefined
profit potential, the underlying
risk
stock price would need to rise
Overview strategy
in price to close at the short
Long call Call ratio
strike prices at expiration. spreads do
Long put
Therefore, a slightly bullish not have a
Short call bias is an appropriate outlook defined
Short put for a call ratio spread. maximum
loss.
Covered call
If the call ratio spread is
Covered put Benefits
initiated for a credit, the profit
Protective put
potential is the amount of
from
Collar strategy credit received plus the width
decreasing
of the spread between the
volatility
LEAPS
long and short call options. Call ratio
Bull call debit spread spreads
However, if the underlying
Bear call credit spread work best
stock price falls below the
when
Bull put credit spread long call option, a profit will volatility
Bear put debit spread still be realized. All options decreases.

Long straddle
would expire worthless, and
the initial credit received Time is
Short straddle
would remain. Call ratio your friend
Long strangle spreads have undefined risk if Call ratio
Short strangle the stock price experiences a spreads
significant move higher above benefit from
Call calendar spread
the short calls. the passage
Put calendar spread of time.
Iron condor
A call ratio spread is used
Reverse iron condor when the underlying asset is
Iron butterfly expected to stay within the
Reverse iron butterfly range between the two strike
prices before expiration.
Call butterfly On this page
 Put butterfly
How to set up a 
Call Ratio Spread market
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Strap
Call Ratio Spread outlook
Call diagonal spread
How to set up a Call Ratio

 Start Here A call ratio spread is a bull call Spread

debit spread with an
Call Ratio Spread payoff
PLATFORM additional call sold at the
diagram
same strike price as the short
 Tour
call in the spread. The bull call Entering a Call Ratio
 Templates spread results in a risk-defined Spread

Integrations position with limited profit

 Exiting a Call Ratio
potential. The goal is for the
Spread
 Pricing stock price to close at the
short strikes at expiration. This Time decay impact on a
EDUCATION
results in the short contracts Call Ratio Spread
 Courses expiring worthless, and the Implied volatility impact
long call could be sold with
 Strategies on a Call Ratio Spread
the maximum intrinsic value.
Adjusting a Call Ratio
Overview
Spread
If the underlying stock price
Long call
drops below the long strike, all Rolling a Call Ratio
Long put
options expire worthless, and Spread
Short call the maximum loss is limited to
Hedging a Call Ratio
Short put the debit paid or, if a credit
Spread
Covered call was received at trade entry,
the credit will be realized as a
Covered put
profit. However, because of
Protective put the single naked call, if the
Collar strategy underlying asset’s stock price
LEAPS exceeds the short call options,
the risk is unlimited.
Bull call debit spread

Bear call credit spread

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

Call calendar spread

Put calendar spread Call Ratio Spread

Iron condor payoff diagram
Reverse iron condor

Iron butterfly The call ratio spread payoff

diagram illustrates the
Reverse iron butterfly
strategy’s different outcomes
Call butterfly based on the underlying stock
 Put butterfly price. Ideally, the stock price
Strap closes at the short strike  Login Free Trial
options at expiration. When a
Call diagonal spread
call ratio spread is entered,
 Start Here there is potential for either
paying a debit or receiving a
PLATFORM
credit.
 Tour
If a credit is received, the
 Templates
amount collected, plus the
 Integrations width of the strike prices, is
the maximum potential profit
 Pricing
for the position. If a debit is
EDUCATION paid, the maximum potential
profit is the width of the
 Courses
spread between the short and
 Strategies long strikes, minus the amount
paid to enter the position.
Overview

Long call Maximum gain and loss are

Long put limited if the stock price falls
below the long call option. All
Short call
contracts would expire
Short put
worthless, and the premium
Covered call paid or received at entry will
Covered put remain for a profit or loss.
Protective put
Maximum loss is unlimited if
the stock price exceeds the
Collar strategy
break-even point above the
LEAPS short calls.
Bull call debit spread

Bear call credit spread For example, if a stock is

Bull put credit spread
trading at $52, a call ratio
spread could be entered with
Bear put debit spread
one long call at $50 and two
Long straddle short calls at $55. Assume a
Short straddle $1.00 credit is received. If the
Long strangle stock closes at $55 the
maximum profit potential is
Short strangle
realized. $600 is the most that
Call calendar spread can be made on the trade (the
Put calendar spread width of the spread, $5, plus
Iron condor the $1.00 credit). The short
calls would expire worthless,
Reverse iron condor
and the long call can be sold
Iron butterfly
for $5, plus the initial $1.00
Reverse iron butterfly credit. If the stock closes at
Call butterfly $61 on expiration, the short
 Put butterfly calls will cost $12 combined to
Strap exit, but the long call will be  Login Free Trial

Call diagonal spread

worth $11.

 Start Here Because the position received

$1.00 at trade entry, the
PLATFORM
position will break-even at
 Tour expiration if the underlying
stock is trading at $61. If the
 Templates
stock closes below $50, all
 Integrations options will expire worthless
and the original credit of $100
 Pricing
will remain. If the stock closes
EDUCATION above $61, the potential loss is
unlimited.
 Courses

 Strategies

Overview

Long call

Long put

Short call

Short put

Covered call

Covered put

Protective put
Entering a Call
Collar strategy
Ratio Spread
LEAPS
A call ratio spread is a bull call
Bull call debit spread spread with a naked call
Bear call credit spread option sold at the same strike
Bull put credit spread price as the short call option
in the spread. Call ratio
Bear put debit spread
spreads consist of buying-to-
Long straddle
open (BTO) one in-the-money
Short straddle long call option and selling-to-
Long strangle open (STO) two out-of-the-
money short call options
Short strangle
above the current stock price.
Call calendar spread
All options have the same
Put calendar spread expiration date.
Iron condor

Reverse iron condor The amount of contracts is

variable, but the most
Iron butterfly
common ratios are 2:1, 3:2,
Reverse iron butterfly
and 3:1. For example, if a stock
Call butterfly is trading at $52, a call ratio
 Put butterfly spread could be entered with
Strap one long call at $50 and two  Login Free Trial

Call diagonal spread

short calls at $55.

 Start Here Entering a call ratio spread

may result in receiving a credit
PLATFORM
or paying a debit. The
 Tour premium depends on multiple
factors, including the width of
 Templates
the spread, how far in-the-
 Integrations money and out-of-the-money
the options are, and implied
 Pricing
volatility skew. For example, if
EDUCATION the marketplace perceives an
asset to be very bullish in the
 Courses
future, out-of-the-money
 Strategies options may be more
expensive than normal,
Overview relative to the in-the-money
Long call option.
Long put

Short call

Short put
Exiting a Call
Covered call
Ratio Spread
Covered put
A call ratio spread will
Protective put
experience its maximum profit
Collar strategy potential if the stock price is
LEAPS exactly the same as the short
strike options at expiration. In
Bull call debit spread
this scenario, or if the stock
Bear call credit spread
price closes below the short
Bull put credit spread options and above the long
Bear put debit spread option, the short call options
Long straddle
expire worthless. The long call
option that is in-the-money
Short straddle
may be sold.
Long strangle

Short strangle If the stock price closes below

Call calendar spread the long call option, all three
Put calendar spread
options will expire worthless,
and no further action will be
Iron condor
needed. If the stock price
Reverse iron condor closes above the short call
Iron butterfly options, all three options will
Reverse iron butterfly be in-the-money and need to

Call butterfly
 Put butterfly be closed if exercise and
Strap assignment are to be avoided.  Login Free Trial

Call diagonal spread

 Start Here
Time decay
PLATFORM impact on a Call
 Tour Ratio Spread
 Templates
Time decay, or theta, works in
 Integrations the advantage of the call ratio
spread. Every day the time
 Pricing
value of an options contract
EDUCATION decreases, which will help to
lower the value of the two
 Courses
short calls. Ideally, the
 Strategies underlying stock experiences
minimal movement, and theta
Overview will exponentially lose value as
Long call the strategy approaches
Long put expiration. The decline in time
value may allow the investor
Short call
to purchase the short options
Short put contracts for less money than
Covered call initially sold, while the in-the-
Covered put money long option will retain
its intrinsic value.
Protective put

Collar strategy

LEAPS
Implied volatility
Bull call debit spread
impact on a Call
Bear call credit spread

Bull put credit spread

Ratio Spread
Bear put debit spread
Call ratio spreads benefit from
Long straddle a decrease in the value of
Short straddle implied volatility. Lower
implied volatility results in
Long strangle
lower option premium prices.
Short strangle
Ideally, when a call ratio
Call calendar spread spread is initiated, implied
Put calendar spread volatility is higher than where
Iron condor it will be at exit or expiration.
Lower implied volatility will
Reverse iron condor
help to decrease the value of
Iron butterfly the two short calls more
Reverse iron butterfly rapidly. Future volatility, or
Call butterfly vega, is uncertain and
 Put butterfly unpredictable. Still, it is good
Strap to know how volatility will  Login Free Trial

Call diagonal spread

affect the pricing of the short
options.
 Start Here

Adjusting a Call
PLATFORM

 Tour
Ratio Spread
 Templates

Integrations Call ratio spreads may be


adjusted before expiration to
 Pricing extend the trade duration or
alter the ratio in the spread. If
EDUCATION
the underlying security rises
 Courses and challenges the short calls,
buying additional long calls to
 Strategies
reduce the call spread to a 1:1
Overview ratio caps the position’s risk.
Adjustments will most likely
Long call
come with additional cost to
Long put the position, which will
Short call increase the risk, lower the
Short put profit potential, and narrow
the break-even points.
Covered call
Furthermore, because call
Covered put
ratio spreads consist of two
Protective put short contracts, assignment is
Collar strategy a risk any time before
expiration.
LEAPS

Bull call debit spread

External factors, such as
Bear call credit spread
dividends, may need to be
Bull put credit spread considered when deciding to
Bear put debit spread adjust or close a call ratio
spread position. If an investor
Long straddle
wants to avoid assignment
Short straddle
risk, and/or needs to extend
Long strangle the trade into the future to
Short strangle allow the strategy more time
Call calendar spread
to become profitable, the
entire position can be closed
Put calendar spread
and reopened at a future
Iron condor expiration date with the same,
Reverse iron condor or new, strike prices. Typically,
Iron butterfly if the stock moves above the
break-even point, the position
Reverse iron butterfly
is closed instead of adjusted.
Call butterfly
 Put butterfly
Rolling a Call  Login Free Trial
Strap
Ratio Spread
Call diagonal spread

 Start Here Call ratio spreads require the

underlying stock price to be at
PLATFORM or near a specific price at
 Tour
expiration. If the position is
not profitable and an investor
 Templates wishes to extend the length of
 Integrations the trade, the call ratio spread
may be closed and reopened
 Pricing for a future expiration date.
Because more time equates to
EDUCATION
higher options prices, the
 Courses rollout may cost money and
add risk to the position,
 Strategies
depending on the initial credit
Overview or debit of the spread.

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

Bear put debit spread

Long straddle Hedging a Call

Short straddle Ratio Spread
Long strangle

Short strangle The most common hedge for a

call ratio spread is the
Call calendar spread
purchase of additional long
Put calendar spread
calls to reduce the spread
Iron condor ratio. Purchasing additional
Reverse iron condor long call options converts the
call ratio spread into a bull or
Iron butterfly
bear call spread, depending
Reverse iron butterfly
on the outlook for the security
Call butterfly at the time of the hedge.
 Put butterfly Protection from lower
Strap movement in the underlying  Login Free Trial

Call diagonal spread

stock is not necessary
because the long call option
 Start Here has defined risk to the
downside.
PLATFORM

 Tour However, if an investor wants

to protect against a significant
 Templates
increase in the stock price, a
 Integrations long call option may be
purchased above the short
 Pricing
strikes. This would effectively
EDUCATION create a bear call spread and
protect against an increase in
 Courses
the underlying stock price. If
 Strategies the stock moves above the
break-even point, the position
Overview may be closed instead of
Long call hedged.
Long put

Short call

Short put

Covered call

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AUTHORS
Reverse iron butterfly

Call butterfly
Kirk Du Plessis