The Ratio Spread: The Strategy Nobody Talks About (But Professional Traders Love)

How to use unequal option ratios for income, reduced cost basis, and strategic flexibility

There's a strategy that's been sitting in professional traders' toolkits for decades—one that retail traders rarely discuss, often misunderstand, and almost never deploy correctly.

The ratio spread.

It's not flashy. It doesn't promise overnight riches. And it requires you to think carefully about volatility, direction, and risk in ways that most income traders avoid. Which is exactly why it works.

If you've spent any time selling premium through cash-secured puts or covered calls, you already understand the core principle behind options income: collecting premium in exchange for accepting defined risk. The ratio spread takes that concept and adds a twist—an unequal number of options that creates a unique payoff profile most strategies can't replicate.

Let's break this down from the ground up.

What Is a Ratio Spread?

A ratio spread is exactly what it sounds like: a spread where the number of options bought and sold are in an unequal ratio—typically 1:2, 2:3, or 1:3.

The most common version—and the one we'll focus on—is the 1:2 ratio spread. In trader-speak, that's a "one-by-two."

Here's the structure:

Call Ratio Spread (1:2):

• Buy 1 call at a lower strike

• Sell 2 calls at a higher strike

• Same expiration

Put Ratio Spread (1:2):

• Buy 1 put at a higher strike

• Sell 2 puts at a lower strike

• Same expiration

The result is a position that typically collects a credit upfront (though it can be initiated for a debit depending on strikes and volatility), has limited risk on one side, and potentially unlimited risk on the other.

That last part makes people uncomfortable. We'll address why it shouldn't—if you structure the trade correctly.

Why Would Anyone Do This?

The ratio spread exists because of a fundamental truth about options pricing: implied volatility isn't distributed evenly across strikes.

Further out-of-the-money options tend to carry elevated implied volatility—particularly on the put side (that's volatility skew). When you sell two options at a further OTM strike and buy one closer to the money, you're essentially monetizing that volatility difference.

You're selling expensive, buying less expensive, and keeping the spread.

But there's more to it than just "selling vol." The ratio spread creates a unique risk/reward profile:

Scenario 1: Stock stays flat or moves slightly in your favor All options expire worthless. You keep the credit.

Scenario 2: Stock moves moderately in your favor Your long option gains value. Your short options lose value. Maximum profit occurs at the short strike at expiration.

Scenario 3: Stock moves significantly against the uncovered leg This is where the risk lives. One of your short options is covered by your long. The other is naked. If the underlying blows through your short strike, you're exposed.

Understanding this third scenario—and structuring around it—is what separates professional ratio spread traders from hobbyists who get burned once and never return.

A Real-World Example: The Put Ratio Spread on Apple

Let's work through a concrete example using Apple (AAPL), which was trading around $259 as of late January 2026.

The Setup:

With AAPL at $259, you're moderately bullish to neutral. You don't expect a significant drop, but you're not convinced the stock is going to rocket higher either. IV is in the mid-20s—elevated compared to the past year's lows but not extreme.

You construct a put ratio spread for the March 21, 2026 expiration (about 45 days out):

• Buy 1 AAPL March 255 put @ $5.20

• Sell 2 AAPL March 245 puts @ $2.80 each ($5.60 total)

Net credit received: $0.40 ($40 per spread)

Let's break down what happens at expiration:

If AAPL stays above $255: All puts expire worthless. You keep the $40 credit. That's your profit for doing essentially nothing—assuming the stock doesn't collapse.

If AAPL settles at $245: This is maximum profit territory. Your 255 put is worth $10.00 ($1,000). Your two 245 puts expire at zero. Total profit: $1,000 + $40 credit = $1,040.

If AAPL drops to $235: Your 255 put is worth $20.00 ($2,000). Each 245 put is worth $10.00 ($2,000 total). Net position value: $2,000 - $2,000 = $0. Add back the $40 credit: breakeven.

If AAPL drops to $225: Your 255 put is worth $30.00 ($3,000). Each 245 put is worth $20.00 ($4,000 total). Net position value: $3,000 - $4,000 = -$1,000. Minus the $40 credit: -$960 loss.

The Math Summary:

Key Levels:

• Upper breakeven: $255 (everything above = keep credit)

• Maximum profit: $245 (short strike)

• Lower breakeven: $234.60 (max profit zone minus initial credit / spread width)

• Below $234.60: Losses accelerate

The Risk Everyone Worries About (And How to Think About It)

Here's where most traders stop reading. They see "unlimited risk below $234.60" and close the browser tab.

But let's think about this differently.

What would it take for AAPL to drop from $259 to $225 in 45 days? That's a 13% decline. It happens, but it's not the baseline expectation. And if you're the type of trader who genuinely believes AAPL could crater 13% or more in the next six weeks, you probably shouldn't be selling puts on it anyway—ratio spread or otherwise.

The ratio spread isn't designed for markets where you expect carnage. It's designed for markets where you expect stability with a slight directional lean.

Here's the mindset shift: If AAPL did drop to $225, what would you do? If you sold two naked puts at $245, you'd be assigned 200 shares at $245—an effective cost basis of $244.60 after accounting for the credit received. Are you comfortable owning 200 shares of Apple at $244.60?

If the answer is no, this isn't your trade.

If the answer is "actually, I'd love to own AAPL 13% lower than today's price with a reduced cost basis," then you're thinking about this correctly.

The Call Ratio Spread: Same Structure, Different Direction

Let's flip it.

Say you're mildly bearish to neutral on SPY, currently trading around $695. You don't expect a massive rally, but you're not convinced the market is about to roll over either.

Call Ratio Spread on SPY (March 21, 2026 expiration):

• Buy 1 SPY March 700 call @ $9.50

• Sell 2 SPY March 710 calls @ $5.50 each ($11.00 total)

Net credit: $1.50 ($150 per spread)

At Expiration:

Key Insight: The call ratio spread caps your risk if SPY drops (you just keep the credit). But if SPY rockets through $721.50, losses mount.

When would you use this? In an environment where you believe upside is limited—perhaps the market has run hard into resistance, IV is elevated, and you'd rather collect premium than chase the rally.

When to Use Ratio Spreads

The ratio spread isn't an everyday strategy. It shines in specific conditions:

1. Elevated Implied Volatility

When IV is high—particularly at the OTM strikes you're selling—the credit received increases. Ratio spreads work best when you're selling inflated premium.

With the VIX hovering around 15-17 (as of early February 2026), we're not in extreme volatility territory, but IV rank on individual equities varies. Earnings season often creates pockets of elevated IV where ratio spreads become attractive.

2. Neutral to Mildly Directional Outlook

Ratio spreads are not swing-for-the-fences trades. They're designed for markets that move slowly or stay range-bound.

• Put ratio spread: Neutral to mildly bullish

• Call ratio spread: Neutral to mildly bearish

If you have a strong directional conviction, a vertical spread or outright option purchase is probably more appropriate.

3. When You'd Accept Assignment

This is the psychological test. On a put ratio spread, if the underlying craters, you're getting assigned shares. Are you okay with that? If not, the trade isn't right.

4. As a PMCC or Wheel Alternative

Some traders use ratio spreads as a variation on the Poor Man's Covered Call or Wheel strategy. Instead of selling one cash-secured put, you sell two—but finance one with a long put at a higher strike. This reduces margin requirements while creating a defined profit zone.

What About the Greeks?

Let's talk position characteristics briefly:

Delta: A put ratio spread starts with positive delta (you profit if the underlying rises). A call ratio spread starts with negative delta (you profit if it falls). But delta changes as price moves.

Theta: Positive. You're net short options (1 long vs. 2 short), so time decay works in your favor—assuming the underlying cooperates.

Vega: Negative. Rising IV hurts the position (your shorts increase in value faster than your long). Falling IV helps. This is why you want to enter when IV is elevated.

Gamma: This is where ratio spreads get dangerous. As expiration approaches and the underlying nears your short strike, gamma increases sharply. The position can swing from profitable to unprofitable quickly. This is not a strategy to set and forget into expiration week.

Managing the Trade

Ratio spreads require active management. Here's the framework:

Take profits early. If you've captured 50-70% of max profit before expiration, consider closing. The risk/reward of holding into expiration rarely justifies the gamma exposure.

Set an adjustment trigger. If the underlying approaches your short strike with significant time remaining, you have choices:

• Roll the short strikes further OTM

• Close the position entirely

• Convert to a different structure (butterfly, broken wing, etc.)

Define your loss limit upfront. Before entering, know at what point you'll exit. "I'll close if the position loses 2x the credit received" is a reasonable starting point.

Watch IV. If implied volatility spikes after entry, the position can show paper losses even if the underlying hasn't moved much. Don't panic—but be prepared to adjust if the move persists.

The Ratio Spread vs. Other Income Strategies

How does this compare to strategies you might already use?

Vs. Cash-Secured Puts: Both can result in share assignment. The ratio spread offers a wider profit zone and potentially higher max profit, but adds a layer of complexity and requires closer monitoring.

Vs. Vertical Spreads: Credit spreads have defined risk on both ends. Ratio spreads have undefined risk on one side but often higher probability of profit when structured correctly.

Vs. Iron Condors: Iron condors are non-directional. Ratio spreads carry a directional lean. If you have a mild bias, the ratio spread can be more efficient.

Vs. Covered Calls: Covered calls require share ownership. Put ratio spreads can achieve similar economics with less capital—assuming you're comfortable with the risk profile.

The Bottom Line

Ratio spreads aren't for everyone. They require:

• A clear understanding of volatility dynamics

• Willingness to accept assignment at your short strike

• Active position management

• Discipline to take profits early and cut losses when necessary

But for traders who've grown comfortable with basic premium-selling strategies and want to expand their toolkit, the ratio spread offers something unique: a way to monetize volatility skew, create a wide profit zone, and potentially enhance returns—all while maintaining a probability-focused framework.

The strategy isn't about predicting where Apple goes or whether SPY breaks out. It's about understanding what you're willing to accept, structuring a trade around those parameters, and managing the position systematically.

That's income trading at its core. The ratio spread just gives you another tool to do it.

Probabilities over predictions,

Andy Crowder

Founder & Chief Options Strategist, The Option Premium

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Disclaimer: This is educational content only. Not investment advice. Options involve risk and aren't suitable for all investors. Examples are illustrative. Real results will vary. Talk to professionals before you risk real money.