Unbalanced

Ratio Spread and Back Spread

Spreads using different numbers of options on each side.

Expiration payoff profile for Ratio Spread and Back Spread
Payoff at expiration

Ratio Spreads and Back Spreads use different numbers of options, while the options are of the same type and expiration.

A ratio spread buys one option that is generally close to at-the-money and then pays for that option by selling two options that are further from at-the-money. Usually the trade is done for little or no net premium. A ratio spread expects a small move in a particular direction but loses money if the move is too great. The loss from a ratio spread is theoretically unlimited.

A back spread buys two options that are at some distance from at-the-money in expectation of a big move and finances those two options by selling one option that is closer to at-the-money. A back spread is executed in expectation of a large move in a particular direction but loses money if the underlying stock moves in the desired direction and doesn't move far enough. The loss from a back spread is limited, while the profit potential is theoretically unlimited.

Cheat sheet

Ratio Spread Cheat SheetPDF Backspread Cheat SheetPDF

← All spreads and combinations