Ratio Calendar Spread Trades

A useful modification of the classic calendar spread trade is the ratio calendar spread trade. The ratio concept simply means that fewer contracts are sold than are bought. The purpose of having more long contacts than short ones is to remove the constraint on one end of the profitability range, thereby allowing for unlimited profit if the stock price makes a large move in the appropriate direction.

Using either call or put options for the ratio calendar spread, fewer near month contracts are sold than the number purchased of distant month contacts. With calls, this has the effect of opening the upper end of the risk graph for unlimited profit if the stock price moves higher. Analogously, with puts, this has the effect ...

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