Ratio back spreads

Sell one, buy two. Small profit if you're wrong, big profit if a big move comes — and a danger zone in between.

Lesson 6 of 128 min read

The idea

What if you strongly expect a big rally, but don't want to lose much if the market falls instead? A call ratio back spread does exactly that by selling one option and buying two cheaper ones.

Leg	Action	Option	Price	Lots
1	Sell	22200 CE (ITM)	₹376.40	1
2	Buy	22600 CE (OTM)	₹163.55	2
	Net credit	376.40 − 2 × 163.55		₹49.30

You actually receive money to put this on, because the one ITM call you sell is worth more than the two OTM calls you buy.

If NIFTY falls

+₹3,204

Keep the credit

Max loss

₹22,796

Exactly at 22,600

Breakevens

22,249 / 22,951

If NIFTY rallies hard

Unlimited

Drag: where does NIFTY close on expiry day?22,400

If NIFTY ends at 22,400, you lose ₹9,796.

Call ratio back spread: sell 1 × 22200 CE, buy 2 × 22600 CE. A 'V' with a raised left arm.

Walk through the three zones

NIFTY at expiry	Sold 22200 CE (you owe)	2 × 22600 CE (you own)	Net P&L incl. credit (1 lot)
22,000	worthless	worthless	+₹3,204.50 (the credit)
22,400	−200	worthless	−₹9,795.50
22,600	−400	worthless	−₹22,795.50 (worst)
22,950.70	−750.70	+701.40	₹0
23,200	−1,000	+1,200	+₹16,204.50

1
Market falls → small win
All calls expire worthless. You keep the ₹49.30 credit. Being wrong on direction still pays a little.
2
Market drifts up a bit → the danger zone
Between the strikes, the sold ITM call loses while the two bought calls are still worthless. Worst case is exactly at the higher strike, 22,600.
3
Market rallies hard → big win
Above 22,600, you own two calls against one sold: you gain two rupees for every one you lose. Profit is unlimited.

The bearish twin: put ratio back spread

Flip everything for a big fall: sell one ITM put, buy two OTM puts.

Leg	Action	Option	Price	Lots
1	Sell	22600 PE (ITM)	₹307.25	1
2	Buy	22200 PE (OTM)	₹121.10	2
	Net credit			₹65.05

Drag: where does NIFTY close on expiry day?22,400

If NIFTY ends at 22,400, you lose ₹8,772.

Put ratio back spread: +₹4,228 if NIFTY rises, max loss ₹21,772 at 22,200, big profit below 21,865.

When to use them

Good fit

You expect a BIG directional move (budget, election, RBI surprise).
You want to be paid something if you are wrong on direction.
IV is low (you are net long options, so rising IV helps).

Poor fit

You expect only a small move — that is the danger zone.
Very close to expiry, when the danger zone has no time to escape.
You cannot stomach the max loss.

Quick check

Where does the call ratio back spread lose the most?