SHORT RATIO CALL SPREAD
Overview
Buy one lower-strike call and sell two higher-strike calls. Often entered for a credit or zero cost. Profits if the stock rises moderately to the short strikes but stays below the upper breakeven. Above that level, losses accumulate as one short call is naked.
What it does
You buy one call for protection and sell two calls at a higher strike. The two short calls generate a credit that offsets the cost of the long call — often resulting in a trade entered for a credit or zero cost. If the stock rises moderately to the short strike, you collect maximum profit. If it rises beyond the upper breakeven, one short call is 'naked' and losses begin to mount.
Structure
sell 2 calls + buy 1 call
Setup
- 1.Buy 1 Call at a lower strike.
- 2.Sell 2 Calls at a higher strike.
- 3.Same expiration.
Max profit
(Short Strike − Long Strike + Net Credit) × 100. Achieved when stock closes at the short call strike at expiration.
Max loss
Unlimited above the upper breakeven — one short call has no long option covering it.
Breakeven
Upper breakeven: Short Strike + Max Profit per Share.
When to use
When you're moderately bullish with a specific upside price target and want to trade for a credit or zero cost.
When to avoid
If there's any chance of a strong breakout above the upper breakeven — the naked short call creates unlimited upside risk.
Example trade
Stock: AAPL at $150 Buy 1 AAPL $150 Call at $5.00 Sell 2 AAPL $160 Calls at $2.80 each (credit $5.60) Net Credit: $0.60 ($60) Expiration: 30 days Max Profit: ($160 - $150 + $0.60) × 100 = $1,060 (if AAPL pins at $160) Max Loss: Unlimited above $170.60 Lower Breakeven: ~$149.40 (but small credit protects this) Upper Breakeven: $160 + $10.60 = $170.60
Common mistakes
- ×Using on highly volatile stocks where breakout above the upper breakeven is likely.
- ×Forgetting that one of the two short calls is unhedged — treat it like a naked call above the upper breakeven.
- ×Not having a stop-loss plan — the unlimited upside risk demands defined exit rules.
- ×Entering for too small a credit relative to the risk taken.
- ×Confusing this with a call backspread — directions are reversed.
FAQ
What is the maximum profit on a ratio call spread?
Maximum profit occurs when the stock closes exactly at the short call strike at expiration. Above that, one short call starts generating losses.
How do I turn this into a defined-risk trade?
Buy a third call at a higher strike to cap the naked short call loss — this converts it into a butterfly.