Ratio Spreads are advanced options strategies constructed by buying and selling different quantities of options on the same underlying asset, with the same expiration date but different strike prices. The defining characteristic is the unequal number of options purchased versus sold, typically with more options sold than bought, creating tailored risk-reward profiles.
Mechanism
The operational architecture involves combining a long option position with a larger short option position. For instance, a call ratio spread might involve buying one call option at a lower strike and selling two calls at a higher strike. The premium collected from the additional short options often offsets or exceeds the cost of the long option, potentially creating a net credit. The complexity lies in managing the asymmetric risk profile, particularly if the underlying crypto asset moves sharply against the short positions.
Methodology
Institutional crypto traders deploy ratio spreads to express nuanced directional and volatility outlooks, often seeking to profit from limited price movement or a specific volatility environment. The methodology involves carefully selecting strike prices and the ratio of options to create a desired risk graph, which can include defined maximum loss or unlimited risk if improperly managed. These strategies are frequently implemented using smart trading platforms that can execute multi-leg orders and monitor the combined position’s delta and gamma exposure in real-time.
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