168 Part II: Call Option Strategies 
position. However, the position has naked options on both sides, and therefore has 
tremendous liability. 
In practice, professionals watch more than just the delta; they also watch other 
measures of the risk of a position. Even then, price and volatility changes can cause 
problems. Advanced risk concepts are addressed more fully in the chapter on 
Advanced Concepts. 
SUMMARY 
Ratio writing is a viable, neutral strategy that can be employed with differing levels 
of sophistication. The initial ratio of short calls to long stock can be selected simplis­
tically by comparing one's opinion for the underlying stock with projected break-even 
points from the position. In a more sophisticated manner, the delta of the written 
calls can be used to determine the ratio. 
Since the strategy has potentially large losses either to the upside or the down­
side, follow-up action is mandatory. This action can be taken by simple methods such 
as rolling up or down in a constant ratio, or by placing stop orders on the underlying 
stock. A more sophisticated technique involves using the delta of the option to either 
adjust the stock position or roll to another call. By using the delta, a theoretically neu­
tral position can be maintained at all times. 
Ratio writing is a relatively sophisticated strategy that involves selling naked 
calls. It is therefore not suitable for all investors. Its attractiveness lies in the fact that 
vast quantities of time value premium are sold and the strategy is profitable for the 
most probable price outcomes of the underlying stock. It has a relatively large prob­
ability of making a limited profit, if the position can be held until expiration without 
frequent adjustment. 
AN INTRODUCTION TO CALL SPREAD STRATEGIES 
A spread is a transaction in which one simultaneously buys one option and sells 
another option, with different terms, on the same underlying security. In a call 
spread, the options are all calls. The basic idea behind spreading is that the strategist 
is using the sale of one call to reduce the risk of buying another call. The short call in 
a spread is considered covered, for margin purposes, only if the long call has an expi­
ration date equal to or longer than the short call. Before delving into the individual 
types of spreads, it may be beneficial to cover some general facts that pertain to most 
spread situations.