What is the risk/reward ratio?
What does the ratio say about a trade?
The risk/reward ratio sets a position’s possible gain against its possible loss. On options it almost always runs opposite to the win rate: strategies that win often tend to carry an unfavourable ratio. Only the two numbers together describe a trade — either one on its own is misleading.
How to calculate it
Divide the maximum gain by the maximum loss, or the other way round — conventions differ, so always check which number sits on top. On a credit spread the gain is the credit and the loss the width minus the credit; on a debit spread the roles swap. For trades without a fixed maximum, traders use a planned exit, such as a profit target and a stop, instead. The ratio is then only as reliable as the discipline behind that plan.
The win rate a ratio requires
Every ratio implies a minimum win rate at which the trade breaks even over many repetitions: the loss divided by the sum of gain and loss. Risking 300 to make 100 needs a win rate above 75 percent; risking 100 to make 300 needs only 25 percent. That is why high-probability credit strategies and unfavourable ratios come together, and why neither number on its own tells you whether a strategy has an edge.
The common misreading
A favourable ratio looks like a better trade and an unfavourable one like a worse trade. Neither is true on its own. Option prices already balance payout against probability, so moving the strikes mostly trades one for the other. The useful question is whether your real win rate, measured over enough closed trades, beats the break-even rate the ratio demands — and only a record of those trades can answer it.
Worked example
Hypothetical numbers for illustration, not a market quote and not a recommendation.
An example stock trades at 100 €. You sell the 97 € put and buy the 92 € put with the same expiration for a net credit of 1.25 € per share. Maximum gain is 125 € per contract, maximum loss (5 − 1.25) × 100 = 375 €, so you risk 3 to make 1.
The break-even win rate is 375 / (375 + 125) = 75 percent. Assuming every trade ends at either the maximum gain or the maximum loss, a win rate of 80 percent yields 0.8 × 125 − 0.2 × 375 = 25 € per trade on average; at 70 percent the average is −25 €. Fees are ignored.
Strategies where the term matters
- Bull Put Spread — Do you want a credit against an obligation - or would you rather pay a debit?
- Long Call Butterfly — Do you have a precise price target - not just a direction?
- Short Iron Condor — Is the range you expect genuinely narrower than the move the market has priced in?
Calculators for this term
Track it in your journal
Related terms
Every term in one place: the options glossary.
This material is general information about option strategies, written for a general audience. It is not investment advice, not a recommendation, and not financial analysis. Options can lose their entire value, and uncovered positions can lose more than the amount committed. Anything said about tax is general in nature and is no substitute for professional tax advice. Last reviewed: 2026-08-06.