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Summary

Ratio spreads use unequal quantities of options at different strikes, trading away a bounded profit zone for extra gamma or extra credit2. Backspreads (more longs than shorts, e.g., sell 1 ATM, buy 2 OTM) are long gamma and long vega — a directional vol-buy that can be entered for a credit. Front ratios (more shorts, e.g., buy 1, sell 2) are the mirror: short gamma/short vega income with an unhedged short tail beyond the long strike3.

Construction

  • Call backspread: sell 1 ATM call, buy 2 higher calls. Often for a small credit with flat skew. Profit if the underlying rips higher; small loss in the dead zone between strikes.
  • Put backspread: sell 1 ATM put, buy 2 lower puts — profits on a crash. Note that under steep equity put skew the extra lower-strike longs carry higher IV, so these typically cost a debit rather than a credit.
  • Front ratio (one-by-two): buy 1, sell 2 at a further strike — collects the extra short premium as income. TOMIC uses these as downside adjustment vehicles and runs them when IV is in the lower 40% of its range with flat skew1.

Payoff Table

Call backspread — short 100 call, long 2× 105 calls, credit 0.50:

Price at expiry P&L
≤ 100 +0.50 (credit kept)
~103–105 (dead zone) Maximum loss ≈ strike gap − credit
≥ 110 Increasingly profitable — long tail is open upward

Front ratio 1×2 — long 100 call, short 2× 105 calls, credit 1.00: max profit 6.00 at 105, then loss grows linearly above 110 — unlimited risk beyond the short strikes3.

Greeks Profile

Greek Backspread Front ratio
Delta Small/net long toward the long strikes Long near body, then flips short above shorts
Gamma Long — wants fast, big moves Short — movement hurts
Theta Negative (paying for gamma) Positive
Vega Long Short

Both flip greek signs as the underlying crosses strikes — dynamic positions that must be managed, not set-and-forget2.

Best Regime / Market View

  • Backspread: IV in the lower range, flat skew, and an opinion that a big directional move is coming (direction unknown if run delta-neutral)1. Put backspreads typically cost a debit under steep equity put skew (lower-strike OTM puts carry higher IV) and express a conviction in extreme downside plus volatility expansion; skew harvesting belongs to call ratios and broken-wing variants instead.
  • Front ratio: quiet-to-moderate drift with the target landing near the short strikes; skew steepness pays the extra short leg.
  • TOMIC targets ~10% returns from vol expansion or a directional move with backspreads1.

Primary Risks

  • Unlimited (or very large) risk on front ratios above/below the short strikes — the defining hazard; gaps through the short strikes are the worst case3.
  • Backspread dead zone: maximum loss if the underlying lands between strikes at expiry after paying for gamma that never engaged.
  • Theta bleed on backspreads during quiet regimes; vega loss if IV falls after entry.
  • Strike-crossing sign flips make hedges stale quickly.

Management Levers

  • Set a hard stop/adjustment trigger tied to the short strike — never let a front ratio run unhedged through its shorts.
  • Roll or add the missing long leg to convert a front ratio into a butterfly when the move arrives early.
  • Take backspread profits into strength; the dead zone is the risk budget.
  • Size by tail risk, not credit: one extra short contract defines the worst case.

Variants

  • 1×3 and ladder ratios: steeper long tails (more convexity) or steeper income.
  • Ratio vertical vs. ratio strangle families (Christmas tree).
  • Kite spread: TOMIC's adjustment-specific ratio — buy 1 call below, sell 2–3 call spreads against it; long gamma, short vega, inexpensive1.
  • Skip-strike butterfly: a front ratio capped by a third long strike — removes the unlimited tail.

Links

Source Notes

  1. TOMIC ratio spread conditions, goals, and kite adjustments, ../option-traders-hedge-fund-bundle/topics/strategies.md. ↩↩↩↩

  2. Trading Option Greeks, ratio spread family, ../trading-option-greeks/topics/spreads.md. ↩↩

  3. Natenberg on backspreads and ratio verticals, ../option-volatility-and-pricing-bundle/topics/spreads.md. ↩↩↩