A covered ratio spread is a multi-legged operation that consists of. Ownership of the underlying stock; The sale of two out-of-the-money call options; and. The purchase of one further out-of-the-money option.

What are the 3 types of spreads?

There are three main types of options spread strategy: vertical, horizontal and diagonal. A vertical spread strategy – sometimes known as a money spread – uses two options with identical expiry dates but different strike prices.

What is the downside of covered calls?

Cons of Selling Covered Calls for Income – The option seller cannot sell the underlying stock without first buying back the call option. A significant drop in the price of the stock (greater than the premium) will result in a loss on the entire transaction.