When options traders believe a stock could make a big upside move, timing is often the hardest part. In this interview, Levi Woods explains how he uses the ratio diagonal to express a bullish view while keeping risk defined and letting time work in his favor.
Watch Levi Woods explain the ratio diagonal
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Levi Woods
Levi Woods is a long-time options trader and educator based in Canada. He has traded stocks since the 1990s and options for more than a decade, focusing almost exclusively on structured options positions rather than outright stock ownership. Today, he runs an educational YouTube channel where he teaches practical, real-world options trading with an emphasis on risk control and capital efficiency.
What is a ratio diagonal?
At its core, a ratio diagonal is a combination of three defining elements: different strikes, different expiration dates, and different numbers of contracts sold and bought.
In Levi’s approach, the ratio diagonal is constructed to create a directional trade with both positive delta and positive theta. That combination is unusual and is what makes the strategy especially interesting for traders with a strong bullish thesis.
- Positive delta means the position benefits if the stock rises.
- Positive theta means time decay works for the trader rather than against them.
This allows the trader to stay positioned even if the stock does not move immediately.
- Watch other interviews with retail options traders
- Doc Severson: 0DTE Iron Fly
- Doc McGraw: Trading with gamma exposure levels
- Bill Belt: Rolling Put Diagonal
When Levi uses the ratio diagonal
Levi is very clear: this is not an everyday income trade.
He uses the ratio diagonal when he believes a stock has significant upside potential, the move could take time to develop, and he wants exposure without committing large amounts of capital.
In the interview, he gives examples of stocks he believes could double over time, while acknowledging that predicting when that move happens is difficult. The ratio diagonal is designed for exactly that situation.
How the trade is structured
While the exact strikes and expirations vary by setup, the structure generally looks like this.
- 2 short-term calls are sold slightly above or near the current stock price.
- 3 longer-dated calls are purchased further out in time and further out of the money
- Since more long calls are owned than short calls are sold, a ratio has been created.
The short calls generate theta decay, helping offset the cost of the longer-dated calls. The long calls provide the upside exposure if the stock makes a large move.
The result is a position that has defined risk, can generate profits if the stock rises, and can still benefit if the stock remains stable for a period of time.
Why positive delta and positive theta matter
Many directional options trades force traders to make a tradeoff. Either you get delta but suffer from theta decay, or you collect theta but cap your upside.
Levi’s ratio diagonal aims to balance both.
Levi emphasizes that he looks at the net position, not individual legs. His goal is to create a position that behaves like owning shares to the upside while still generating income through time decay.
This is especially useful when the trader is early on an idea and does not want to be punished for imperfect timing.
Risk is defined from the start
One of the most important aspects of Levi’s ratio diagonal is that risk is defined at entry. The maximum loss is limited to the net debit paid to open the trade.
This makes the strategy suitable for speculative ideas, hunch-based trades on potential breakouts, and situations where conviction is high but certainty is low.
Levi treats these trades as small allocations within a larger portfolio, allowing him to stay disciplined even if the trade does not work out.
Trade management over prediction
Another key takeaway from the interview is that Levi focuses far more on management than prediction.
- If the stock moves up strongly, profits can be taken at any time.
- If the stock stays flat, short calls can be rolled to continue collecting premium, and hence lower the cost base
- If the stock moves down, the loss is capped and known in advance.
This mindset allows the trader to stay calm and systematic rather than reactive.
Who is the ratio diagonal best suited for?
According to Levi, the ratio diagonal is best suited for intermediate options traders, traders comfortable with multi-leg positions, and traders who think in terms of positions rather than single trades.
It is especially appealing for traders who already use directional strategies but want a more capital-efficient and risk-controlled way to express those views.
Levi says he aims for stocks he believe has a chance of doubling in value. This allows him to make a bet without overexposing his capital.
