A short call ratio strategy with a 1x3 structure is created by purchasing one lower-strike call option and selling three higher-strike call options with identical expiration dates. This aggressive ratio yields a larger net credit upfront compared to a 1x2 ratio, helping to offset initial costs or generate higher premium income. Traders enter this trade when they expect the stock price to stay near or below the higher strike price through expiration.
The maximum profit is achieved if the stock closes right at the higher strike price at expiration, allowing you to capture the full spread value plus the initial credit. Because you leave two short calls completely uncovered, the potential upside loss is unlimited and accelerates rapidly if the stock moves heavily past the higher strike price. Downside risk remains capped, allowing you to keep any net credit if the stock falls and all options expire worthless.
- Buy one $100 Call for $4.50
- Sell three $105 Calls for $2.50 each
- Stock at $105: +$800 Max Profit
- Stock ≤ $100: +$300 Credit Kept
- Stock > $109: Unlimited Loss Potential (e.g., -$1,200 at $115)