Consider a ratio spread comprising a call at strike $K _ { 1 }$ and short two calls at strike $K _ { 2 } K _ { 1 }$ .The current stock price is at $K _ { 1 }$ .The market view for this trade is most likely to be:

Question

Consider a ratio spread comprising a call at strike $K _ { 1 }$ and short two calls at strike $K _ { 2 } > K _ { 1 }$ .The current stock price is at $K _ { 1 }$ .The market view for this trade is most likely to be:

Quizplus · Accepted Answer

A ratio spread, especially one involving calls where you buy a call at a lower strike price ($K_1$) and sell two calls at a higher strike price ($K_2$), suggests the expectation that the stock will rise but not beyond $K_2$ by a significant margin. This strategy profits from a moderate increase in the stock price up to $K_2$, beyond which the losses from the two short calls start to outweigh the gains from the long call. This does not necessarily imply a view on volatility, skewness, or a belief that the stock is more likely to fall.

Consider a Ratio Spread Comprising a Call at Strike K1K _ { 1 }K1​

Consider a Ratio Spread Comprising a Call at Strike $K _ { 1 }$