158 Part II: Call Option Strategies 
FOLLOW-UP ACTION 
Aside from closing the position completely, there are three reasonable approaches to 
follow-up action in a ratio writing situation. The first, and most popular, is to roll the 
written calls up if the stock rises too far, or to roll down if the stock drops too far. A 
second method uses the delta of the written calls. The third follow-up method is to 
utilize stops on the underlying stock to alter the ratio of the position as the stock 
moves either up or down. In addition to these types of defensive follow-up action, the 
investor must also have a plan in mind for taking profits as the written calls approach 
expiration. These types of follow-up action are discussed separately. 
ROLLING UP OR DOWN AS A DEFENSIVE ACTION 
The reader should already be familiar with the definition of a rolling action: The cur­
rently written calls are bought back and calls at a different striking price are written. 
The ratio writer can use rolling actions to his advantage to readjust his position if the 
underlying stock moves to the edges of his profit range. 
The reason one of the selection criteria for a ratio write was the availability of 
both the next higher and next lower striking prices was to facilitate the rolling actions 
that might become necessary as a follow-up measure. Since an option has its great­
est time premium when the stock price and the striking price are the same, one 
would normally want to roll exactly at a striking price. 
Example: A ratio writer bought 100 XYZ at 49 and sold two October 50 calls at 6 
points each. Subsequently, the stock drops in price and the following prices exist: 
XYZ, 40; XYZ October 50, l; and XYZ October 40, 4. 
One would roll down to the October 40 calls by buying back the 2 October 
50's that he is short and selling 2 October 40's. In so doing, he would reestablish a 
somewhat neutral position. His profit on the buy-back of the October 50 calls 
would be 5 points each - they were originally sold for 6 - and he would realize a 
10-point gain on the two calls. This 10-point gain effectively reduces his stock cost 
from 49 to 39, so that he now has the equivalent of the following position: long 100 
XYZ at 39 and short 2 XYZ October 40 calls at 4. This adjusted ratio write has a 
profit range of 31 to 49 and is thus a new, neutral position with the stock currently 
at 40. The investor is now in a position to make profits if XYZ remains near this 
level, or to take further defensive action if the stock experiences a relatively large 
change in price again. 
Defensive action to the upside - rolling up -works in much the same manner.