How to Sell the Ratio Credit Spread


Apr

11

2016

How to Sell the Ratio Credit Spread

Michael Gross explains what he considers to the “the best” option selling strategy – The Ratio Credit Spread. Learn how to sell commodities options for premium and also give yourself substantial upside.
  1. Good Evening,
    Can you elaborate a bit, on what happens to the Long $70 Call, if the trade makes an Explosive move upwards, and say it is at $77 come Expiration ….. That wound put you $7,000 ITM on the $70 Call correct ?

    So would your Profit be $3,500 ……. $7,000 profit from the Long $70 call – $2,400 from the Three $75 calls we sold – $1,100 the cost for us to initially buy the $70 call ?

    And Lastly Please ….. How many Months out till Expiration is recommended for the Ratio Credit Spread ?

    Thanks so much – Michael

    • Michael Gross Says:
      May 5, 2016 at 3:51 pm

      Hello Michael,

      You’re understanding of the ratio spread is spot on. But you are assuming the options expire with the market at exactly 77.00. If the market moved beyond that level, losses could begin to accrue quickly. Typically, we would not recommend holding the options thru this type of move, unless it was very close to expiration. Our main reason to use the ratio spread is to keep you in the market for wide moves with the strikes still out of the money. Once your long call goes in the money, this can become a high maintenance (although potentially more profitable) spread.

      As far as how many months to go out – we typically recommend 3-5 months under normal conditions for naked options. Ratios can work in this time frame. However, we’ve found you sometimes need to go a month or two further out in time to get the optimum spread premium.

      I hope this helps.

      -Michael

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