Chapter 06 · Section 6.1

Ratio Call or Ratio Put Spread?

As we discussed in the previous topic, the ratio call spread is entered into when you believe that the market will remain stable. The ratio put spread is built upon the same principle, but is constructed using puts. Again, loss is limited on one side of the market and unlimited on the opposite side.

Assume that your market outlook is stable, with the possibility of a sharp rise in the market. Would you choose the ratio call or ratio put spread?

• a) ratio call
  No. Recall that the ratio call spread has unlimited loss if the market rallies. If you have to realize a loss, you would prefer that this loss be limited.
  b) ratio put