Add training workflow, datasets, and runbook
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TABLE 11-2.
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Ratio write and ratio spread compared.
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Profit range
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Maximum profit
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Downside risk
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Upside risk
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Initial investment
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Ratio Write:
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Buy XYZ of 50 and
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Sell 2 July SO's at 5
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40 to 60
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10 points
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40 points
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40 points
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$3,000
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Part II: Call Option Strategies
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Ratio Spread:
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Buy 1 July 40 of 11 and
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Sell 2 July SO's at 5
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41 to 59
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9 points
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1 point
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Unlimited
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$1,600
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In Chapter 6, it was pointed out that ratio writing was one of the better strate
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gies from a probability of profit viewpoint. That is, the profit potential conforms well
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to the expected movement of the underlying stock. The same statement holds true
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for ratio spreads as substitutes for ratio writes. In fact, the ratio spread may often be
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a better position than the ratio write itself, when the long call can be purchased with
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little or no time value premium in it.
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RATIO SPREAD FOR CREDITS
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The second philosophy of ratio spreads is to establish them only for credits.
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Strategists who follow this philosophy generally want a second criterion fulfilled also:
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that the underlying stock be below the striking price of the written calls when the
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spread is established. In fact, the farther the stock is below the strike, the more
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attractive the spread would be. This type of ratio spread has no downside risk
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because, even if the stock collapses, the spreader will still make a profit equal to the
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initial credit received. This application of the ratio spread strategy is actually a sub
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case of the application discussed above. That is, it may be possible both to buy a long
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call for little or no time premium, thereby simulating a ratio write, and also to be able
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to set up the position for a credit.
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Since the underlying stock is generally below the maximum profit point when
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one establishes a ratio spread for a credit, this is actually a mildly bullish position.
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The investor would want the stock to move up slightly in order for his maximum prof
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it potential to be realized. Of course, the position does have unlimited upside risk, so
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it is not an overly bullish strategy.
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