Ratio spread

 

Ratio spreads involve buying one option and selling a greater quantity of an option with a more OTM strike. The options are either both calls or both puts. It is a limited profit that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term.

Call ratio spreads lose money when the stock price rises sharply so will apply in sidwasy market ( elliot 4wave up wave in progressing in nature ).Call ratio spreads work best when the stock price moves to the strike price of the short call (and no higher) at expiration.It can be any ratio, but we will focus on ratio spreads created using a 2:1 ratio with 2 options sold to 1 option bought.A short call ratio spread means buying one call (generally an at-the-money or otm call) and selling two calls at the same expiration but with a higher strike.

The combined Vega of the two short calls will generally be much greater than that of the single long call. 

 

put ratio spreads lose money when the stock price drops sharply.so will apply in sidewasy market (elliot 4th down wave in progressing in nature ).put ratio spreads work best when the stock price moves to the strike price of the short put (and no lower) at expiration.A put ratio spread is a bear vertical (typically a long put vertical) plus extra short put options at the lower of the two strikes.The actual behavior of the strategy depends largely on the Delta, Theta and Vega of the combined position as well as whether a debit is paid or a credit received when initiating the position.The combined Vega of the two short puts will generally be greater than that of the single long put

Suppose you have your eye on a certain stock and say, “I don’t want to buy it at the current level, as it looks ripe for a slow drift downward, but if it gets below a certain price, I’d consider buying.”put ratio is designed for just such a scenario.If the stock continues down past your short strike at expiration, you’ll likely be left with a long stock position after exercise and assignment.