9. Ratio Spread
The Call Ratio Spread and Put Ratio Spread are the only options trading strategies capable of making a profit in all three of the ways a market can move: Upward, downward or sideways. Ratio Spreads are similar to vanilla Spread trades, but put on more positions on one leg of the strategy, hence a ratio.
Call Ratio Spread: Long call A, Short calls B
Use when the market is near A and you expect to see a slight rise in the market, but there is potential for a selloff. Maximum profit (B – A – cost of position) is realized if market expires at B. Loss is limited on the downside, but is open-ended if market rises.
Put Ratio Spread: Long put B, Short puts A
Use when market is near B and you expect it to fall slightly, but you see a potential for sharp rise. Maximum profit (B – A – cost of position) is realized if market is at A at expiration. Loss is limited on the upside, but open-ended if the market falls.