Ratio Spreads
The simplest versions of these strategies used by retail traders, institutional
traders, proprietary traders, and others are referred to as ratio spreads . In
ratio spreads, options are bought and sold in quantities based on a ratio. For
example, a 1:3 spread is when one option is bought (or sold) and three are
sold (or bought)—a ratio of one to three. This kind of ratio spread would be
called a “one-by-three.”
However, some option positions can get a lot more complicated. Market
makers and other professional traders manage a complex inventory of long
and short options. These types of strategies go way beyond simple at-
expiration diagrams. This chapter will discuss the two most common types
of ratio spreads—backspreads and ratio vertical spreads—and also the
delta-neutral position management of market makers and other professional
traders.