A Ratio Write is an options trading strategy that involves selling a greater number of options contracts than are bought, typically with the same expiration date but different strike prices. This strategy is generally implemented when a trader expects limited price movement or a slight directional bias in the underlying asset.
Mechanism
The operational construction typically involves selling two or more out-of-the-money options for every one at-the-money or in-the-money option purchased, usually of the same type (e.g., call options). The premium collected from the excess short options aims to offset the cost of the long option and generate a net credit. This structure creates a defined risk and reward profile.
Methodology
The strategic application of a ratio write seeks to generate income from premium collection while benefiting from the underlying crypto asset remaining within a specific price range. This methodology carries substantial risk if the asset’s price moves sharply against the direction of the short options, necessitating careful selection of strike prices and continuous risk management.
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