Ratio Spreads

When we are discussing Volatility spreads, it is not necessary for traders to have no view in the market. In Ratio Spreads, the trader benefits if there is a movement towards one direction. We have already discussed one such variation of Ratio Spreads namely Ratio Straddle!

Here, The term “Ratio” comes because the options trader is constructing the strategy with buying/selling unequal ratios of put options and call options, mostly to keep the net strategy delta neutral.

  • A ratio spread where more options are purchased than sold is sometimes referred to as back spread.
  • A ratio spread where more options are sold than purchased is sometimes referred to as front spread.

Under the assumption of Black Scholes Model, if we construct delta neutral ratio spreads, even when the options are purchased more than sold, will always result in a net credit.

Generally, the Ratio Spreads have all PEs or all CEs. If it has all PEs, it is referred to as Put Ratio Spread and if it has all CEs, it is referred to as Call Ratio Spread.

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