Ratio spread

Ratio spread

The ratio-spread is a strategy in options trading that involves buying some number of options and selling a larger number of other options of the same underlying market and (usually) the same expiration date, but of a different strike price.

Ideally, this strategy should be used when either A) the implied volatility of the options expiring in a particular month has recently moved sharply higher and is now beginning to decline, or B) the trader believes for whatever reason that the underlying market of the option(s) will move steadily in his favor during the life of the option. The trader will use call options in this strategy if he believes the underlying market will move steadily higher, and put options if he believes the market will move steadily lower.

In the case of call options, the trader will buy some number of options having striking price X and write (sell) a larger number of options having striking price Y, where Y is greater than X. In the case of put options, the trader will buy some number of options having striking price A, but write (sell) a larger number of options having striking price B, where B is less than A.

The "straight" ratio-spread describes this strategy if the trader buys and writes (sells) options having the same expiration. If, instead, the trader executes this strategy by buying options having expiration in one month but writing (selling) options having expiration in a different month, this is known as a ratio-diagonal trade.

As with all option spreads, the trader in a ratio-spread will strongly prefer to buy options having a distinctly lower implied volatility than the options he is writing (selling).

The world's most widely read author on option trading, Larry McMillan, offers a very fine and detailed description of this strategy in his book "Options as a Strategic Investment", in both the 3rd and 4th editions of the work. The less well-known author, S. A. Johnston, offers very sound tactical commentary on this strategy in his book "Trading Options to Win".

ee also

*Options spread

References

* cite book
last = McMillan| first = Lawrence G.
title = Options as a Strategic Investment
edition = 4th ed.
publisher = New York : New York Institute of Finance
year = 2002
id = ISBN 0-7352-0197-8


Wikimedia Foundation. 2010.

Игры ⚽ Поможем сделать НИР

Look at other dictionaries:

  • Ratio Spread — An options strategy in which an investor simultaneously holds an unequal number of long and short positions. A commonly used ratio is two short options for every option purchased. A ratio spread would be achieved by purchasing one call option… …   Investment dictionary

  • ratio spread — Constructed with either puts or calls, the strategy consists of buying a certain amount of options and then selling a larger quantity of more out of the money options. Bloomberg Financial Dictionary …   Financial and business terms

  • Options spread — Spread option redirects here. For the American football offensive scheme, see Spread offense. Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of… …   Wikipedia

  • Spread (Wirtschaft) — Als Spread (von engl. spread für Spanne) bezeichnet man in der Wirtschaft allgemein die Differenz zwischen zwei einheitsgleichen zu vergleichenden Größen. Als Indikator findet der Spread insbesondere Anwendung im Wertpapierhandel und in der… …   Deutsch Wikipedia

  • ratio calendar combination — A strategy consisting of a simultaneous position of a ratio calendar spread using calls and a similar position using puts, where the striking price of the calls is greater that the striking price of the puts . Bloomberg Financial Dictionary …   Financial and business terms

  • spread — See bearing spread overall gear ratio …   Dictionary of automotive terms

  • spread spectrum communications —    The process of modulating a signal over a significantly larger bandwidth than is necessary for the given data rate for the purpose of lowering the bit error rate (BER) in the presence of strong interference signals (i.e., low signal to noise… …   IT glossary of terms, acronyms and abbreviations

  • Debit spread — In finance, a debit spread, AKA net debit spread, results when an investor simultaneously buys an option with a higher premium and sells an option with a lower premium. The investor is said to be a net buyer and expects the premiums of the two… …   Wikipedia

  • delta spread — A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased option by the delta of the written option. See also ratio spread and… …   Financial and business terms

  • Credit spread (options) — Finance Financial markets Bond market …   Wikipedia

Share the article and excerpts

Direct link
… Do a right-click on the link above
and select “Copy Link”