A ratio spread buys and sells an unequal number of options — for example, buying one call and selling two further-out calls (a 1x2 ratio). The extra short options bring in more premium, often making the position very cheap or even a credit — but they also create uncovered (naked) exposure beyond a point.
How it works
Take a call ratio spread: buy one at-the-money call, sell two out-of-the-money calls. If price rises modestly to the short strike, you profit nicely — the long call gains and the shorts are near their sweet spot. The premium from selling two options offsets the cost of buying one, so entry is cheap. It's a targeted bet on a moderate move.
The naked tail
Here's the danger: you're short more options than you're long, so beyond the short strike you have uncovered exposure. If price blows through — a big move in the direction you sold — those extra short options create unlimited (calls) or very large (puts) losses. The cheap entry hides a fat tail. This is not a defined-risk trade like a vertical or condor.
A ratio spread pays you for a moderate move and can ruin you on a violent one. The cheap entry is the bait.
The honest warning
Ratio spreads are an advanced, negatively-skewed structure — pleasant most of the time, catastrophic in the tail if unmanaged. They demand strict sizing, a plan for the naked leg, and respect for tail risk. Attractive to traders who forget that "cheap" and "safe" are not the same word. Understand exactly where your uncovered exposure begins before you put one on.