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+216 Part II: Call Option Strategies 
+In Chapter 6 on ratio writing, it was seen that it was possible to alter the ratio 
+to adjust the position to one's outlook for the underlying stock The altering of the 
+ratio in a ratio spread accomplishes the same objective. In fact, as will be pointed out 
+later in the chapter, the ratio may be adjusted continuously to achieve what is con­
+sidered to be a "neutral spread." A similar tactic, using the option's delta, was 
+described for ratio writes. 
+The following formulae allow one to determine the maximum profit potential 
+and upside break~even point for any ratio: 
+Points of maximum = Net credit+ Number oflong calls x 
+profit Difference in striking prices or 
+= Number of long calls X Difference in 
+striking prices - Net debit 
+Upside break-even = Points of maximum profit ff h t "ki . 
+point Number of naked calls + ig er s n ng pnce 
+These formulae can easily be verified by checking the numbers in Table 11-3. 
+THE "DELTA SPREAD" 
+The third philosophy of ratio spreading is a more sophisticated approach that is often 
+referred to as the delta spread, because the deltas of the options are used to estab­
+lish and monitor the spread. Recall that the delta of a call option is the amount by 
+which the option is expected to increase in price if the underlying stock should rise 
+by one point. Delta spreads are neutral spreads in that one uses the deltas of the two 
+calls to set up a position that is initially neutral. 
+Example: The deltas of the two calls that appeared in the previous examples were 
+.80 and .50 for the April 40 and April 45, respectively. If one were to buy 5 of the 
+April 40's and simultaneously sell 8 of the April 45's, he would have a delta-neutral 
+spread. That is, if XYZ moved up by one point, the 5 April 40 calls would appreciate 
+by .80 point each, for a net gain of 4 points. Similarly, the 8 April 45 calls that he is 
+short would each appreciate by .50 point for a net loss of 4 points on the short side. 
+Thus, the spread is initially neutral - the long side and the short side will offset each 
+other. The idea of setting up this type of neutral spread is to be able to capture the 
+time value premium decay in the preponderance of short calls without subjecting the 
+spread to an inordinate amount of market risk. The actual credit or debit of the 
+spread is not a determining factor.