A back/ratio spread is the selling of a higher price strike and buying of two lower price strikes simultaneously in the same expiration month. The ratio part of this strategy refers to the amount of strikes sold in relation to the amount of strikes bought. It is always done at a 2:1 ratio. Sell one, buy two. Sounds like a lot but it is very simple.To summarize, this strategy requires a stock to move past a certain strike price. It is not for neutral markets at all. The strategies can be broken down as a debit spread or a credit spread. When you buy (debit) a back/ratio, you are anticipating that a stock price will move in a certain direction. Whey you sell (credit) a back/ratio, you are anticipating that a stock will move in a certain direction BUT will also recieve a credit if it moves below the strike being sold.
The Debit Back/Ratio Spread
You determined that a stock is going to make a definite move either up or down. If you determined a stock is going to make a definite move up, you can use a debit back ratio call spread. A debit back/ratio call spread is selling a higher price call strike and buying two lower price call strikes in the same expiration month.
If you determined a stock is going to make a definite move up, you can use a debit back ratio put spread.. A debit back ratio put spread is selling a higher price put strike and buying two lower price put strikes in the same expiration month.
The Credit Back/Ratio Spread
You determined that a stock is going to make a definite move either up or down but would like some protection if the stock moves against the desired direction. If you determined a stock is going to make a definite move up and want protection, you can use a credit back ratio call spread. A credit back ratio call spread is selling a higher price strike call strike and buying two lower price call strikes in the same expiration month. It is a credit back/ratio call spread because the higher price strike that is sold has more premium than the two lower price strikes combined.
If you determined a stock is going to make a definite move down and want protection, you can use a credit back ratio put spread. A credit back ratio put spread is selling a higher price strike put strike and buying two lower price put strikes in the same expiration month. It is a credit back/ratio put spread because the higher price strike that is sold has more premium than the two lower price strikes combined
