Cl,apter 6: Ratio Call Writing 
TABLE 6-3. 
Initial investment required for a ratio write. 
70% of stock cost (XYZ = 49) 
Plus naked call premiums 
Less total premiums received 
Plus or minus striking price differential 
on naked calls 
$3,430 
+ 600 
- 1,200 
100 
151 
Total requirement $2,730 (plus commissions) 
TABLE 6-4. 
Collateral required with stock at upside break-even point of 63. 
Covered writing requirement $1,850 (see Table 6-2) 
20% of stock price (XYZ = 63) 1,260 
Plus call premium 
Less initial call premium received 
Total requirement with XYZ at 63 
1,400 
600 
$3,910 
Therefore, he should allow for enough collateral to cover the eventuality of a move 
to 63. Assuming the October 50 call is at 14 in this case, he would need $3,910 (see 
Table 6-4). This is the requirement that the ratio writer should be concerned with, 
not the initial collateral requirement, and he should therefore plan to invest $3,910 
in this position, not $2,730 ( the initial requirement). Obviously, he only has to put up 
$2,730, but from a strategic point of view, he should allow $3,910 for the position. If 
the ratio writer does this with all his positions, he would not receive a margin call 
even if all the stocks in his portfolio climbed to their upside break-even points. 
SELECTION CRITERIA 
To decide whether a ratio write is a desirable position, the writer must first determine 
the break-even points of the position. Once the break-even points are known, the 
writer can then decide if the position has a wide enough profit range to allow for 
defensive action if it should become necessary. One simple way to determine if the 
profit range is wide enough is to require that the next higher and lower striking prices 
be within the profit range.