Chapter 11: Ratio Call Spreads 213 
the 6 points that the call would be worth less the 1-point initial net credit - a total of 
$1,520 for this spread ($1,020 + $600 - $100). 
DIFFERING PHILOSOPHIES 
For many strategies, there is more than one philosophy of how to implement the 
strategy. Ratio spreads are no exception, with three philosophies being predominant. 
One philosophy holds that ratio spreading is quite similar to ratio writing - that one 
should be looking for opportunities to purchase an in-the-money call with little or no 
time premium in it so that the ratio spread simulates the profit opportunities from 
the ratio write as closely as possible with a smaller investment. The ratio spreads 
established under this philosophy may have rather large debits if the purchased call 
is substantially in-the-money. Another philosophy of ratio spreading is that spreads 
should be established for credits so that there is no chance of losing money on the 
downside. Both philosophies have merit and both are described. A third philosophy, 
called the "delta spread," is more concerned with neutrality, regardless of the initial 
debit or credit. It is also described. 
RATIO SPREAD AS RATIO WRITE 
There are several spread strategies similar to strategies that involve common stock. In 
this case, the ratio spread is similar to the ratio write. Whenever such a similarity 
exists, it may be possible for the strategist to buy an in-the-money call with little or no 
time premium as a substitute for buying the common stock. This was seen earlier in 
the covered call writing strategy, where it was shown that the purchase of in-the­
money calls or warrants might be a viable substitute for the purchase of stock. If one 
is able to buy an in-the-rrwney call as a substitute for the stock, he will not affect his 
profit potential substantially. When comparing a ratio spread to a ratio write, the max­
imum profit potential and the profit range are reduced by the time value premium 
paid for the long call. If this call is at parity (the time value premium is thus zero), the 
ratio spread and the ratio write have exactly the same profit potential. Moreover, the 
net investment is reduced and there is less downside risk should the stock fall in price 
below the striking price of the purchased call. The spread also involves smaller com­
mission costs than does the ratio write, which involves a stock purchase. The ratio 
writer does receive stock dividends, if any are paid, whereas the spreader does not. 
Example: XYZ is at 50, and an XYZ July 40 call is selling for 11 while an XYZ July 50 
call is selling for 5. Table 11-2 compares the important points between the ratio write 
and the ratio spread.