A ratio spread is an option strategy which has a higher amount of short calls than long calls. 

1:2 ratio spread:

• Long 1 call near the money.
• Short 2 calls further OTM (out-of-the-money) (at a higher strike).

<Ratio spread risk graph retrieved from OptionsPlay>

This strategy can be VERY DANGEROUS because its potential risk is unlimited if the market makes an extreme move up. You would not want to attempt this unless you would be willing to short the equivalent of 100 shares per 1:2 frontspread (if the market moved up to and beyond a certain price level). With any ratio that has more short than long options, the risk is going to be undefined in at least one direction.

A trader might attempt a ratio spread if bullish but not expecting the underlying to move much further past a certain point, such as a Call Wall. 

Advanced: Strategy

Strategically, this is like a broken wing butterfly but with the overhead wingtip completely missing (on a risky bet that it would not go up that far).

When selecting the right options strategy for the situation, one of the best filters is to make sure that there is a skew edge. Index products reliably have negative call skew and positive put skew, which means that index puts have more IV% than index calls. Equities at times will occasionally have the reverse configuration, which results from the retail customer space dominantly shorting puts and buying calls, forming bullish risk reversals if the strikes are spread out, or synthetic longs if the strikes are together. 

Due to the skew penalty, ratio spreads would rarely make sense on an index product, such as SPY or SPX, but if retail is mashing the buttons to buy long calls and dealers are forced to increase those long call prices, then this would reflect as higher IV% further OTM on calls, and it could make sense to write more OTM calls and buy fewer near the money. The most basic configuration of this would be to buy one call ATM and write two calls OTM.

ATM (at the money): An option is at the money when the strike price of an option is the same as the underlying price of the stock.

bullish: A trade is bullish if it would profit from an increase in the underlying (e.g. stock or future) price. Likewise, a trade thesis is bullish if it is expecting the underlying to increase.

Call Wall: The Call Wall is the strike with the largest net call gamma. This shows us what the top of the probable trading range is (the upper bound).

edge: An edge in trading is a competitive advantage but not one that guarantees a profit. It can be any method, idea, or tool which helps to outperform randomness. One way to interpret an edge is that it has a positive expectancy, which means that it would prevail as net profitable after many (ideally hundreds or more) occurrences. A single losing trade can be a good trade the majority of the time and a single winning trade can be just lucky without an edge.  The bottom line is that if you have edge in your trading then you have a positive expected value, where you should come out on top if your trading size is managed well enough that no single trade causes too much loss and allows for many attempts.

long call: To be long (buy and hold) an option contract which has limited risk and unlimited potential gains from moves up in the underlying price. The max loss is the cost of the call. Going long on a call is a simple way to gain upside exposure to movement in an underlying security, however the underlying security (such as a stock) must outperform the premium placed on that call by the options market. In other words, a long call must beat the options market in order to profit. If closed early (well before expiration) then a long call must outpace the expected move (priced in by the options market) for a specific period of time. All long calls have long gamma and long vega but short theta. It is uncommon to exercise calls rather than simply close them for a profit, however a long call is frequently understood as a right to exercise (trade in the long call to be long 100 shares) if above the specified strike price. Synthetically, a long call becomes logically equivalent to a long put if also short 100 shares.

OTM: An option is out-of-the-money if it would have zero value expiring with the underlying at its current price. When an option is out-of-the-money, its entire price is made of extrinsic value, which is a premium that option buyers are willing to pay for an opportunity to make a profit.

skew: Volatility skew is the difference between implied volatility amounts of different options strikes on the same date. Implied volatility is the expected percentage range over one year–based on option prices–with 68.3% confidence. Skew is one of the main edges to look for in an options trade, especially on vertical spreads (all options are on the same date). Sometimes it is a penalty dragging down a good trade, but it is nonetheless important to understand the extent of how much it can challenge a trade if knowingly accepting to take the opposite side of a skew advantage.

short call: To be short (sell to open and hold) a call. Unless otherwise hedged, the owner of the short call has unlimited risk and only limited potential gains, which makes this an extremely dangerous strategy in isolation. If left to expire, a short call will achieve max profit if the price ends up underneath the strike price. Shorting a call is a way to express a thesis that one is “not bullish” such as what might be justifiably the case if testing a Call Wall from underneath; being “not bullish” is different than being bearish. For a short call to be profitable, the underlying security must underperform the premium placed on that call by the options market. In other words, a short call profits when the underlying security fails to beat the options market. To be closed early for a profit, there needs to be a decrease in implied volatility or the underlying must have increased less than the options market has priced in for that specific period of time. All short calls have short gamma and short vega but long theta. Short options also come with obligations instead of rights, which means that, at any time, shares can be assigned (100 short shares for each contract); assignment usually only happens when in-the-money and near expiration). Synthetically, a short call becomes logically equivalent to a short put if the trader is also long 100 shares.

SPY: This is the largest ETF (exchange traded fund) and represents the S&P 500. As an ETF, it can be traded just like a stock. This represents nearly the 500 largest and most successful US companies that are publicly traded. Often when someone asks how the market is doing, you can answer by telling them how SPY is doing. The S&P 500 is also the most common baseline for other funds to be compared to, either in performance or as a measure of beta (relative correlation and percentage range).

strike: The price that an option is based on. A long call will expire worthless if the price of the underlying security finishes underneath the strike price, and a long put will expire worthless if the underlying finishes above the strike price.

synthetics: In options, synthetics are different structures that have the same logical dynamics, including the same max loss, max profit, chance of winning, and option Greeks. Synthetics are possible because options have the property of put-call parity. For spreads, long puts can be swapped for long calls and short puts can be swapped for short calls (and vice versa) in a way that creates synthetic matches without the need of adjusting deltas with shares. On single-leg options, however, puts and calls can be swapped in the same way, but require directionally-offsetting positions in the underlying security (such as a certain amount of shares).

underlying: A reference to the immediate price of the underlying security. This is also sometimes called spot (the spot price of the underlying). The spot price is in contrast to derivatives which have option prices or [forward] futures prices.

wingtip: A wingtip is what we call the endpoint of an options strategy where it is furthest out of the money (OTM). A reference to a wingtip is always to the furthest-OTM strike in a strategy. If the main leg on a vertical strategy (both options on the same date) is a credit (a premium is received for taking on some risks and potential obligations), then a long-option wingtip protects against some short gamma risk (directional risk that can increase and accelerate). The cost of defining the risk is giving up some of the premium collected. In order for risk to become defined with main credit legs, then at least as many further-OTM long contracts would need to be written.

writing: We say “write” when a trader sells an option to open a new position. Simply saying “to sell” an option is unclear, as that could mean either selling-to-close or selling-to-open a new position. The most common example of writing is the covered call strategy, which is buying 100 shares in a stock and then selling-to-open a short call on that same stock. In general, writing is to accept an obligation, and there is time-decay income in exchange for that risk (as well as the risk of assignment which is being delivered shares that can create a jump in directional risk).