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+152 Part II: Call Option Strategies 
+Example: The writer is buying 100 XYZ at 49 and selling 2 October 50 calls at 6 
+points apiece. It was seen, by inspection, that the break-even points in the position 
+are 37 on the downside and 63 on the upside. A mathematical formula allows one to 
+quickly compute the break-even points for a 2:1 ratio write. 
+Points of maximum profit = Strike price - Stock price + 2 x Call price 
+Downside break-even point = Strike price - Points of maximum profit 
+= Stock price - 2 x Call price 
+Upside break-even point = Strike price + Points of maximum profit 
+In this example, the points of maximum profit are 50 - 49 + 2 x 6, or 13. Thus, 
+the downside break-even point would be 37 (50 - 13) and the upside break-even 
+point would be 63 (50 + 13). These numbers agree with the figures determined ear­
+lier by analyzing the position. 
+This profit range is quite clearly wide enough to allow for defensive action 
+should the underlying stock rise to the next highest strikes of 55 or 60, or fall to the 
+next two lower strikes, at 45 and 40. In practice, a ratio write is not automatically a 
+good position merely because the profit range extends far enough. Theoretically, 
+one would want the profit range to be wide in relation to the volatility of the under­
+lying stock. If the range is wide in relation to the volatility and the break-even 
+points encompass the next higher and lower striking prices, a desirable position is 
+available. Volatile stocks are the best candidates for ratio writing, since their pre­
+miums will more easily satisfy both these conditions. A nonvolatile stock may, at 
+times, have relatively large premiums in its calls, but the resulting profit range may 
+still not be wide enough numerically to ensure that follow-up action could be taken. 
+Specific measures for determining volatility may be obtained from many data serv­
+ices and brokerage firms. Moreover, methods of computing volatility are present­
+ed later in the chapter on mathematical applications, and probabilities are further 
+addressed in the chapters on volatility trading. 
+Technical support and resistance levels are also important in establishing the 
+position. If both support and resistance lie within the profit range, there is a better 
+chance that the stock will remain within the range. A position should not necessarily 
+be rejected if there is not support and resistance within the profit range, but the 
+writer is then subjecting himself to a possible undeterred move by the stock in one 
+direction or the other. 
+The ratio writer is generally a neutral strategist. He tries to take in the most 
+time premium that he can to earn the premium erosion while the stock remains rel­
+atively unchanged. If one is more bullish on a particular stock, he can set up a 2:1 
+ratio write with out-of~the-money calls. This allows more room to the upside than to 
+the downside, and therefore makes the position slightly more bullish. Conversely, if