COVERED RATIO SPREAD
Overview
A covered ratio spread overlays a 1×2 call structure on 100 shares you already own. By buying one ATM call and selling two OTM calls at a recovery target, it doubles your upside participation between the current price and the short-call strike while capping gains above that level. Net cost is typically zero or a small credit.
What it does
Between the current price and the short-call strike, the position acts like 200 shares: the long call adds ~100 shares of delta on top of the actual 100 shares. This accelerated participation recovers losses at twice the normal rate. Above the short strike, delta collapses toward zero as the two short calls offset the long call and stock gains.
Structure
own 100 shares + buy 1 ATM call + sell 2 OTM calls
Setup
- 1.Confirm you hold 100 shares in the same account.
- 2.Choose an expiration 45–75 days out with tight bid/ask spreads.
- 3.Buy 1 call at or just below the current stock price (ATM or slightly ITM).
- 4.Sell 2 calls at your recovery target (OTM) — same expiration.
- 5.Route as a single multi-leg order for a net credit or debit under $0.25.
- 6.Verify the short calls are covered: one by the stock, one by the long call.
Max profit
Capped at the short-call strike. In the SPY example (long at $420, short at $450), max profit ≈ $4,820 — stock gain + accelerated call gain — reached near $450.
Max loss
Same as owning 100 shares outright — the overlay adds no downside protection. The small credit slightly offsets stock losses.
Breakeven
No new breakeven is created. The $20 credit reduces the stock's effective cost basis by $0.20/share.
When to use
When you own stock that has pulled back and you expect a moderate rebound to a specific target but not a runaway rally. Best entered when IV is elevated enough to generate a zero-cost overlay.
When to avoid
When you are very bullish and want unlimited upside. Once the stock exceeds the short-call strike, all additional gains are capped. Also avoid if a dividend ex-date falls within the expiration — the OTM short calls carry early-assignment risk.
Example trade
Underlying: SPY at $420 (cost basis $450) Expiration: 60 days Buy 1 SPY 420 Call at $12.00 Sell 2 SPY 450 Calls at $6.10 each Net entry: +$20 credit Best case at $450: Stock +$3,000 + Long call +$1,800 + Shorts $0 = +$4,820 Breakeven (stock): $420 (no new breakeven — credit is tiny) Worst case ($350): Stock −$7,000 + Options net +$20 = −$6,980 (same as holding stock)