Chapter 11: Ratio Call Spreads 217 
It is a fairly simple matter to determine the correct ratio to use in the delta 
spread: Merely divide the delta of the purchased call by the delta of the written call. 
In the example, this implies that the neutral ratio is .80 divided by .50, or 1.6:1. 
Obviously, one cannot sell 1.6 calls, so it is common practice to express that ratio as 
16:10. Thus, the neutral spread would consist of buying 10 April 40's and selling 16 
April 45's. This is the same as an 8:5 ratio. Notice that this calculation does not 
include anything about debits or credits involved in the spread. In this example, an 
8:5 ratio would involve a small debit of one point (5 April 40's cost 25 points and 8 
April 45's bring in 24 points). Generally, reasonably selected delta spreads involve 
small debits. 
Certain selection criteria can be offered to help the spreader eliminate some of 
the myriad possibilities of delta spreads on a day-to-day basis. First, one does not 
want the ratio of the spread to be too large. An absolute limit, such as 4:1, can be 
placed on all spread candidates. Also, if one eliminates any options selling for less 
than ½ point as candidates for the short side of the spread, the higher ratios will be 
eliminated. Second, one does not want the ratio to be too small. If the delta-neutral 
ratio is less than 1.2:1 (6:5), the spread should probably be rejected. Finally, if one is 
concerned with downside risk, he might want to limit the total debit outlay. This 
might be done with a simple parameter, such as not paying a debit of more than 1 
point per long option. Thus, in a spread involving 10 long calls, the total debit must 
be 10 points or less. These screens are easily applied, especially with the aid of a com­
puter analysis. One merely uses the deltas to determine the neutral ratio. Then, if it 
is too small or too large, or if it requires the outlay of too large a debit, the spread is 
rejected from consideration. If not, it is a potential candidate for investment. 
FOLLOW-UP ACTION 
Depending on the initial credit or debit of the spread, it may not be necessary to take 
any downside defensive action at all. If the initial debit was large, the writer may roll 
down the written calls as in a ratio write. 
Example: An investor has established the ratio write by buying an XYZ July 40 call 
and selling two July 60 calls with the stock near 60. He might have done this because 
the July 40 was selling at parity. If the underlying stock declines, this spreader could 
roll down to the 50's and then to the 45's, in the same manner as he would with a ratio 
write. On the other hand, if the spread was initially set up with contiguous striking 
prices, the lower strike being just below the higher strike, no rolling-down action 
would be necessary.