Long Call Spread Ratio 2×1 & Long Put Spread Ratio 1×2
A Long Call Spread Ratio 2×1 is a bullish strategy built up with three calls options. Investors should sell a call K1 and buy two calls K2 with same expiration. This strategy is implemented when an investor bets that the underlying will rise significantly. It is also considered as a bullish volatility strategy. Indeed, the payoffs are close to a vanilla straddle, except that profits are capped on the left (under strike K1, 100 in our example). The long ratio put spread, on the contrary, is a 1×2 spread combining one short put and two long puts with a lower strike. All options have the same expiration date. This strategy is the combination of a bull put spread and a long put, where the strike of the long put is equal to the lower strike of the bull put spread.
The Long Put & Call Spread Ratio 2×1 payoffs are illustrated below:
A Long Call Spread Ratio 2×1 offers unlimited potential profits, if the underlying price rise well above K2 (105 in our chart) and exceeds the break-even point of 110. The maximum loss is capped and reach when the underlying price is equal to K2 (105 in our chart). Then, this strategy is interesting in terms of risk engaged, as losses are limited to premium paid for the two calls bought. For the Put Spread Ratio, a trader should do this with put options and smaller strikes (95 for K1 and 100 for K2 in our chart).
Regarding the greeks, the delta will rise towards 1 if the underlying skyrockets well above K2 strike, and toward -1 for a put spread ratio as the underlying drops well below K1 strike (at 95 in our example). Delta can be negative if at maturity, the underlying price is equal or very close to K1 strike. Gamma is positive and grow significantly between K1 and K2, maximum is reach at K2 and after this point, it starts to decrease. Gamma could be negative close or at expiration if the underlying price is equal or close to K1. Theta is negative as the investor write two calls (or two puts) and long one call (or one put). However, as expiration approaches, theta could become positive if the underlying price is close or below K1 strike. Vega is positive and implied volatility increase will increase the value of the whole strategy (both using call or put options). Vega could become negative if the underlying is well under or close to K1 strike at maturity.