An option trading strategy (a credit spread) which involves selling at-the-money and in-the-money options and purchasing a larger number of at-the-money and out-of-the-money options. The ratio represents a relationship between a combination of short and long option positions. Thus, a 2 to 3 ratio for example means sell two options and buy three options. The appeal of ratio spreads lies in its very nature where an investor can still make a profit even if his view on an underlying’s movement turned out to be wrong.

That can be explained by looking at “delta”. When the underlying price goes deeper in the money, the individual deltas of all positions go up, till finally they are equal. Because the long positions are more than the short ones, the investor makes a profit almost in all cases. If the price moves up, the long and short positions will be losing money. However, the less-in-number short positions were deeper in the money than the larger-in-number long positions, and the investor is said to have initiated the strategy with a net credit. Therefore, even in the case of the underlying’s price going up, he would still make a profit, though less than expected.

That said, the ratio backspread is inherently a profitable strategy no matter what! And that is why it is sometimes dubbed also a “vacation spread”.