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+484 Part IV: Additional Considerations 
+The risk trader can also use the neutral spread ratio to his advantage. This con­
+cept was illustrated several times in previous chapters describing ratio writing, ratio 
+spreads, and straddle writes. Ratio spreads are quite popular with member firm 
+traders and floor traders. Recall that a ratio spread consists of buying options at acer­
+tain strike, and selling more options further out-of-the-money. The hedge ratios can, 
+of course, be used by the trader, or by a public customer, to initially establish a neu­
+tral position. Perhaps more important, the hedge ratio can also be used as a follow­
+up action to keep the position neutral after the stock changes in price. This strategy 
+is the "delta spread" described in Chapter 11. 
+The risk trader is not attempting to establish the spread with the idea of mini­
+mizing risk for small stock movements. Rather, he is looking to make a profit, but 
+would prefer to remain as neutral as possible on the underlying stock. He is imple­
+menting a risk strategy that has a neutral outlook on the underlying stock. He is sell­
+ing much more time value premium than he is buying. 
+Example: The purchase of 15 January 30 calls and the sale of 30 January 35 calls - a 
+ratio call spread - may be a position taken for profit potential. It would be a neutral 
+position if the deltas were .60 and .30, for example. This spread would do best if the 
+stock were at exactly 35 at expiration. However, if the stock rose quickly before expi­
+ration, the spread ratio would decrease from 2:1 to perhaps 3:2. That is, the neutral 
+ratio between the January 30 call and the January 35 call should be 3 short January 
+35's to 2 long January 30's. If the trader wants to balance his position, he could buy 5 
+more January 30's, giving him a total of 20 long versus the 30 short January 35's that 
+he originally sold. Conversely, if the stock dropped in price, the neutral spread ratio 
+might increase, indicating that more calls should be sold. For example, if this stock 
+declines, the neutral ratio might be 3:1. In that case, 15 more January 35's could be 
+sold, making the position short 45 calls versus 15 long calls, which would produce the 
+neutral 3:1 ratio. 
+It would not be proper to adjust the ratio constantly, because the frequent 
+whipsaw losses on trading movements would wipe out the profit potential of the posi­
+tion. However, the trader may want to pick out points, in advance, at which he wants 
+to reevaluate his position before something drastic goes wrong. For example, if the 
+foregoing spread were established with the stock at a price of 30, the spreader might 
+want to readjust at 33 or 27, whichever comes first. 
+By monitoring the spread using the hedge ratio, the trader may also be able to 
+discern whether he has established too bullish or too bearish a position. 
+Example: The trader starts with the example described above - long 15 January 30 
+calls and short 30 January 35 calls - when the hedge ratios were .60 and .30, respec-