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Natenberg mentions in chapter titled "Volatility Spreads" :

under the assumptions of a traditional theoretical pricing model, a delta-neutral ratio spread where more options are purchased than sold should always result in a credit.enter image description here

Is there an intuitive logic behind this?

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  • $\begingroup$ This blog post gives some insight: "[I start] by selling a call out of the money, and then buying two calls that have half the Delta of the short call I sold. The logic is that the Deltas will add up to zero, and I’ll be Delta neutral. This means that initial price changes won’t impact the value of the position. Also, because of reverse skew in Implied Volatility, the long calls will be priced well under half the price of the short calls, so the net result will be a credit. So, the one short call more than pays for the two long calls." $\endgroup$
    – nbbo2
    Aug 2 at 15:41
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    $\begingroup$ I think natenberg is claiming the result to be true in case of flat skew, atleast that is my interpretation of "under the assumptions of a traditional theoretical pricing model". But even in case of reverse skew, whats the reason " the long calls will be priced well under half the price of the short calls"? $\endgroup$
    – Shreyans
    Aug 2 at 16:01

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