The structure

A ratio call spread (bullish):

Buy 1 lower-strike call
Sell 2 higher-strike calls

Same idea for puts (bearish direction). The “ratio” refers to the imbalance between long and short legs.

The trade collects net credit or requires small debit depending on strike distance. It’s a bet that the underlying lands at or near the short strike at expiry.

A worked example

Example

Nifty 1×2 ratio call spread

Nifty at ₹25,000. Monthly expiry 21 days out. You’re mildly bullish but expect Nifty to top out around 25,300.

Buy 1 Nifty 25,000 CALL @ ₹200 → −₹5,000
Sell 2 Nifty 25,300 CALL @ ₹90 → +₹4,500

Net debit: ₹500 (small)

Max profit occurs at expiry with Nifty at 25,300:

25,000 call worth 300 → +₹7,500
2 × 25,300 calls worth 0 → 0
Net: 7,500 − 500 = +₹7,000

Break-evens:

Lower: 25,000 + 20 = 25,020 (near-immediate profit start)
Upper: 25,600 (payoff crosses zero on the way down)

Loss scenarios:

Nifty at 25,700 (past upper break-even):

25,000 call worth 700 → +₹17,500
2 × 25,300 calls worth 400 each → −₹20,000
Net: 17,500 − 20,000 − 500 = −₹3,000

Nifty at 26,500 (runaway rally):

25,000 call worth 1,500 → +₹37,500
2 × 25,300 calls worth 1,200 each → −₹60,000
Net: 37,500 − 60,000 − 500 = −₹23,000 and growing linearly

Nifty at 24,800 (drops): all worthless. Loss = only the ₹500 debit paid.

The payoff shape

The graph looks like a shark’s fin:

Cheap loss going down (debit paid)
Rising profit zone from 25,020 upward
Peak profit at 25,300
Declining profit past 25,300
Break-even at 25,600
Unlimited loss above 25,600 (net short 1 call)

The math

1×2 ratio call spread

Net debit/credit = Long premium − 2 × Short premium (per share)

Max profit (at short strike, at expiry) = (Short strike − Long strike) − Net debit (per share)

Upper break-even = Short strike + (Short strike − Long strike) − Net debit

Max loss = Unlimited above upper break-even

When it makes sense

Strong price target view — you expect underlying to reach and stall near X
Small directional bet with big potential payoff if right
Post-event mean-reversion — after a big rally, expect consolidation around a level

When it destroys accounts

Underlying breaks past short strikes — losses grow linearly and fast
Vol expansion — short calls hurt when IV spikes
Underestimating tail risk — the “unlikely” 5% Nifty rally happens ~2-4 times/year

⚠️ You're net-short options

A 1×2 ratio spread is essentially long 1 call + short 1 naked call. The extra short call has unlimited risk. Only trade this with a clear stop-loss plan.

Ratio put spread (bearish version)

Same structure with puts:

Buy 1 higher-strike put
Sell 2 lower-strike puts

Bet: underlying falls to and stalls at the lower strike. Loss if it crashes past.

Managing the trade

Best exits:

Take profit at 50-75% of max profit — don’t wait for expiry
Close the “naked” short leg if underlying approaches the short strike
Roll: buy back the two shorts, sell two further-OTM strikes for credit

Cut loss triggers:

Underlying reaches upper break-even
Vol spikes 30%+ suddenly
Any event you didn’t plan for

Variation: 1×3 or 2×3

More aggressive ratios (sell 3, buy 1) collect bigger credits but have even worse tail risk. Not recommended for retail unless you deeply understand the exposure.

The safer alternative: use spreads not ratios

If you just want directional exposure without unlimited risk, use a bull call spread (Chapter 6) instead. You give up the peak-payoff shape but eliminate the tail risk. Better risk-adjusted for most traders.

Ratio spreads are for traders who genuinely have edge on identifying tops/bottoms — a small minority. Everyone else is better off with vertical spreads.