A bull call spread involves going long on a lower strike call and short on a higher strike call of the same expiry on the same underlying. What if you instead go long on two contracts of the lower strike call and short one contract of the higher strike call? This week, we discuss the ratio bull call spread and explore the conditions under which initiating the strategy may be optimal.

Your outlook on the underlying must be bullish. But why a ratio bull call spread instead of a bull call spread? Suppose the implied volatility of calls is lower compared to the recent past, it means calls are trading cheap. This can improve your potential reward if you go long on two contracts of the lower strike call. Why? A long position is exposed to time decay — loss in time value with each passing day. Now, time value, and therefore time decay, is a function of the demand for a strike at a given point in time. The higher the demand, the greater the time value. And the greater the time value, the larger the time decay. Conversely, buying calls when implied volatility is lower leads to lower losses from time decay.  

Now, implied volatility is likely to be lower for calls when its underlying has seen a secular downtrend. In the context of options trading, we define a secular downtrend as five to seven consecutive decline days. During this period, puts are likely to be in high demand; compared to the recent past, implied volatility of puts will most likely be higher than that of calls. You can look for appropriate candlestick reversal patterns along with other technical factors to ascertain if the underlying price shows signs of bear exhaustion and signs of bullish reversal. That is when it is optimal to set up the ratio bull call spread. So, low volatility must be at play for you to lean towards the ratio bull call spread.

Your trade-off in setting up the position lies in the choice of expiry. The longer the expiry (near-month), the lower the speed of time decay but higher the time value, and greater the total net debit. If you were to set up the spread with, say, next-week expiry, time decay will accelerate but the total net debit will be lower. So, the higher the price target and the sooner the expected jump in volatility, the more beneficial it is to trade next-week options.

The maximum profit potential in a bull call spread is capped at the short higher strike. In the case of a ratio bull call spread, the profit potential is greater at the short strike because of the additional long call. Also, the additional long call provides further gains when the underlying moves past the higher strike. But the position’s risk is higher because of the higher net debit. Note that the NSE SPAN spread margin benefits are the same as in the case of bull call spread. 

(The author offers training programmes for individuals to manage their personal investments)

Published on September 26, 2026