Chapter 6: Ratio Call Writing 155 
underpriced, the advantage lies with the buyer of calls, and that situation is inherent 
in the reverse hedge strategy. 
The summaries stated in the above paragraph are rather simplistic ones, refer­
ring mostly to what one can expect from the strategies if they are held until expira­
tion, without adjustment. In actual trading situations, it is much more likely that one 
would have to make adjustments to the ratio write along the way, thus disturbing or 
perhaps even eliminating the profit range. Such travails do not befall the reverse 
hedge (simulated straddle buy). Consequently, when one takes into consideration the 
stock movements that can take place prior to expiration, the ratio write loses some of 
its attractiveness and the reverse hedge gains some. 
THE VARIABLE RATIO WRITE 
In ratio writing, one generally likes to establish the position when the stock is trading 
relatively close to the striking price of the written calls. However, it is sometimes the 
case that the stock is nearly exactly between two striking prices and neither the in­
the-money nor the out-of-the-money call offers a neutral profit range. If this is the 
case, and one still wants to be in a 2:1 ratio of calls written to stock owned, he can 
sometimes write one in-the-money call and one out-of-the-money call against each 
100 shares of common. This strategy, often termed a variable ratio write or trape­
zoidal hedge, serves to establish a more neutral profit range. 
Example: Given the following prices: XYZ common, 65; XYZ October 60 call, 8; and 
XYZ October 70 call, 3. 
If one were to establish a 2:1 ratio write with only the October 60's, he would 
have a somewhat bearish position. His profit range would be 49 to 71 at expiration. 
Since the stock is already at 65, this means that he would be allowing room for 16 
points of downside movement and only 6 points on the upside. This is certainly not 
neutral. On the other hand, if he were to attempt to utilize only the October 70 calls 
in his ratio write, he would have a bullish position. This profit range for the October 
70 ratio write would be 59 to 81 at expiration. In this case, the stock at 65 is too close 
to the downside break-even point in comparison to its distance from the upside 
break-even point. 
A more neutral position can be established by buying 100 XYZ and selling one 
October 60 and one October 70. This position has a profit range that is centered 
about the current stock price. Moreover, the new position has both an upside and a 
downside risk, as does a more normal ratio write. However, now the maximum prof­
it can be obtained anywhere between the two strikes at expiration. To see this, note