• Ratio Spread and Back Spread   Ratio Spread

    Ratio Spreads and Back Spreads use different numbers of options while the options are of the same type and expiration. A ratio spread buys one option that is generally close to at-the-money and then pays for that option by selling two options that are further from at-the-money. Usually the trade is done for little or no net premium. A ratio spread expects a small move in a particular direction but losses money if the move is too great. The loss from a ratio spread is theoretically unlimited.

    A back spread buys two options are at some distance from at-the-money in expectation of a big move and finances those two options by selling one option that is closer to at-the-money. A back spread is executed in expectation of a large move in a particular direction but loses money if the undelrying stock moves in the desired direction but doesn't move far enough. The loss from a back spread is limited while the profit potential is theoretically unlimited.

    See the OptionMath.com Ratio Spread Cheat Sheet