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+Chapter 12: Combining Calendar and Ratio Spreads 227 
+itself is a rather high-probability event, because the stock is initially below the strik­
+ing price. In addition, the spread can make large potential profits if the stock rallies 
+after the near-term calls expire. Although this is a much less probable event, the prof­
+its that can accrue add to the expected return of the spread. The only time the spread 
+loses is when the stock rallies quickly, and the strategist should close out the spread 
+in that case to limit losses. 
+Although Table 12-2 is not mathematically definitive, it can be seen that this 
+strategy has a positive expected return. Small profits occur more frequently than 
+small losses do, and sometimes large profits can occur. These expected outcomes, 
+when coupled with the fact that the strategist may utilize collateral such as stocks, 
+bonds, or government securities to set up these spreads, demonstrate that this is a 
+viable strategy for the advanced investor. 
+TABLE 12-2. 
+Profitability of ratio calendar spreading. 
+Event 
+Stock never rallies above 
+strike 
+Stock rallies above strike in a 
+short time 
+Stock rallies above strike after 
+near-term call expires 
+Outcome 
+Small profit. 
+Small loss if defensive 
+action employed 
+Large potential profit 
+DELTA-NEUTRAL CALENDAR SPREADS 
+Probability 
+Large probability 
+Small probability 
+Small probability 
+The preceding discussion dealt with a specific kind of ratio calendar spread, the out­
+of-the-money call spread. A more accurate ratio can be constructed using the deltas 
+of the calls involved, similar to the ratio spreads in Chapter 11. The spread can be 
+created with either out-of-the-money calls or in-the-money calls. The former has 
+naked calls, while the latter has extra long calls. Both types of ratio calendars are 
+described. 
+In either case, the number of calls to sell for each one purchased is determined 
+by dividing the delta of the long call by the delta of the short call. This is the same 
+for any ratio spread, not just calendars. 
+Example: Suppose XYZ is trading at 45 and one is considering using the July 50 call 
+and the April 50 call to establish a ratio calendar spread. This is the same situation