Chapter 11: Ratio Call Spreads 221 
The ESP method is merely a confirmation of the other method. Either one 
works well. The spreader should become familiar with the ESP method because, in 
a position with many different options, it reduces the exposure of the entire position 
to a single number. 
TAKING PROFITS 
In addition to defensive action, the spreader may find that he can close the spread 
early to take a profit or to limit losses. If enough time has passed and the underlying 
stock is close to the maximum profit point - the higher striking price - the spreader 
may want to consider closing the spread and taking his profit. Similarly, if the under­
lying stock is somewhere between the two strikes as expiration draws near, the writer 
will normally find himself with a profit as the long call retains some intrinsic value 
and the short calls are nearly worthless. If at this time one feels that there is little to 
gain (a price decline might wipe out the long call value), he should close the spread 
and take his profit. 
SUMMARY 
Ratio spreads can be an attractive strategy, similar in some ways to ratio writing. Both 
strategies offer a large probability of making a limited profit. The ratio spread has 
limited downside risk, or possibly no downside risk at all. In addition, if the long 
call(s) in the spread can be bought with little or no time value premium in them, the 
ratio spread becomes a superior strategy to the ratio write. One can adjust the ratio 
used to reflect his opinion of the underlying stock or to make a neutral profit range 
if desired. The ratio adjustment can be accomplished by using the deltas of the 
options. In a broad sense, this is one of the more attractive forms of spreading, since 
the strategist is buying mostly intrinsic value and is selling a relatively large amount 
of time value.