What is a call ratio spread?
A call ratio spread (1×2) buys 1 call at a lower strike and sells 2 calls at a higher strike. The premium from the two short calls can exceed the cost of the one long call — potentially creating a net credit. The position profits if the stock stays below the short call strikes or rises modestly to the short strikes at expiration. Above the short strikes, the extra (uncovered) short call creates increasing losses.
Call ratio spread vs bull call spread
A bull call spread buys 1 call and sells 1 call — fully defined risk. A call ratio spread sells 2 calls against 1 long call — higher credit but 1 uncovered short call with undefined risk. The ratio spread is used when you want to generate more premium or enter at a credit, and you have strong conviction the stock will not rally sharply above the short strikes.
Ratio spread management
Monitor the position closely if the stock approaches the short strike level. If the stock rallies through the short strikes, buy back the extra (uncovered) short call immediately to cap risk. Setting a hard stop at the short strike level is essential before entry. Do not hold a call ratio spread passively — the uncovered short call can cause significant losses in a rapid rally.
When to use a call ratio spread
Use when you are moderately bullish and want to collect premium. The stock should have strong resistance above the short call strikes. High IV environments are ideal — the extra short call collects significant premium. Avoid before earnings or in strongly trending bullish markets. The ratio spread is most commonly used by professional traders who can monitor positions actively.