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+Chapter 12: Combining Calendar and Ratio Spreads 223 
+term calls while buyingfewer of the intermediate-term or long-term calls. Since more 
+calls are being sold than are being bought, naked options are involved. It is often pos­
+sible to set up a ratio calendar spread for a credit, meaning that if the underlying 
+stock never rallies above the strike, the strategist will still make money. However, 
+since naked calls are involved, the collateral requirements for participating in this 
+strategy may be large. 
+Example: As in the bullish calendar spreads described in Chapter 9, the prices are: 
+XYZ common, 45; 
+XYZ April 50 call, l; and 
+XYZ July 50 call, l½. 
+In the bullish calendar spread strategy, one July 50 is bought for each April 50 sold. 
+This means that the spread is established for a debit of½ point and that the invest­
+ment is $50 per spread, plus commissions. The strategist using the ratio calendar 
+/ spread has essentially the same philosophy as the bullish calendar spreader: The 
+stock will remain below 50 until April expiration and may then rally. The ratio calen­
+dar spread might be set up as follows: 
+Buy 1 XYZ July 50 call at l½ 
+Sell 2 XYZ April 50 calls at 1 each 
+Net 
+l½ debit 
+2 credit 
+½ credit 
+Although there is no cash involved in setting up the ratio spread since it is done for 
+a credit, there is a collateral requirement for the naked April 50 call. 
+If the stock remains below 50 until April expiration, the long call - the July 50 
+- will be owned free. After that, no matter what happens to the underlying stock, the 
+spread cannot lose money. In fact, if the underlying stock advances dramatically after 
+near-term expiration, large profits will accrue as the July 50 call increases in value. Of 
+course, this is entirely dependent on the near-term call expiring worthless. If the 
+underlying stock should rally above 50 before the April calls expire, the ratio calen­
+dar spread is in danger of losing a large amount of money because of the naked calls, 
+and defensive action must be taken. Follow-up actions are described later. 
+The collateral required for the ratio calendar spread is equal to the amount of 
+collateral required for the naked calls less the credit taken in for the spread. Since 
+naked calls will be marked to market as the stock moves up, it is always best to allow 
+enough collateral to get to a defensive action point. In the example above, suppose 
+that one felt he would definitely be taking defensive action if the stock rallied to 53