A Ratio trade using Options – in this case a Call Ratio – is a trade involving the buying of 1 contract and selling 2 contracts at a higher strike. A trader will typically pick the short strike above near a well-defined resistance level (or maybe even some prior congestion areas).
To illustrate how this trade is set up, I bring you a current Earnings trade that I have on for $COST:
- I am Long the March 07 Weekly 117 Calls
- I am Short the March 07 Weekly 119 Calls (2x)
- This trade was done at a $.16 debit
It is my expectation that their Earnings report will be solid and if there is any push up it will be muted given some Resistance near $119 (January Highs).