21 lines
1.4 KiB
Plaintext
21 lines
1.4 KiB
Plaintext
Ratio Vertical Spreads
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Definition : An option strategy consisting of more short options than long
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options having the same expiration month. Typically, the trader is short calls
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(or puts) in one series of options and long a fewer number of calls (or puts)
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in another series in the same expiration month on the same option class.
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A ratio vertical spread, like a backspread, involves options struck at two
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different prices—one long strike and one short. That means that it is a
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volatility strategy that may be long or short gamma or vega depending on
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where the underlying price is at the time. The ratio vertical spread is
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effectively the opposite of a backspread. Let’s study a ratio vertical using
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the same options as those used in the backspread example.
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With the stock at $71 and one month until March expiration:
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In this case, we are buying one ITM call and selling two OTM calls. The
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relationship of the stock price to the strike price is not relevant to whether
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this spread is considered a ratio vertical spread. Certainly, all these options
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could be ITM or OTM at the time the trade is initiated. It is also not
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important whether the trade is done for a debit or a credit. If the stock price,
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time to expiration, volatility, or number of contracts in the ratio were
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different, this could just as easily been a credit ratio vertical.
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Exhibit 16.4 illustrates the payout of this strategy if both legs of the 1:2
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contract are still open at expiration. |