Chapter 12: Combining Calendar and Ratio Spreads 
FOLLOW-UP ACTION 
229 
If one decides to preserve a neutral strategy with follow-up action in either type of 
ratio call calendar, he would merely need to look at the deltas of the calls and keep 
the ratio neutral. Doing so might mean that one would switch from one type of cal­
endar spread to the other, from the out-of-the-money with naked calls to the in-the­
money with extra long calls, or vice versa. For example, if XYZ started at 45, as in the 
first example, one would have sold more calls than he bought. If XYZ then rallied 
above 50, he would have to move his position into the in-the-money ratio and get 
long more calls than he is short. 
While such follow-up action is strategically correct maintaining the neutral 
ratio - it might not make sense practically, especially if the size of the original spread 
were small. If one had originally sold 5 and bought 3, he would be better to adhere 
to the follow-up strategy outlined earlier in this chapter. The spread is not large 
enough to dictate adjusting via the delta-neutral ratios. If, however, a large trader had 
originally sold 500 calls and bought 300, then he has enough profitability in the 
spread to make several adjustments along the way. 
In a similar manner, the spreader who had established a small in-the-money cal­
endar might decide not to bother rationing the spread if the stock dropped below the 
strike. He knows his risk is limited to his initial debit, and that would be small for a 
small spread. He might not want to introduce naked options into the position if XYZ 
declines. However, if the same spread were established by a large trader, it should be 
adjusted because of the greater tolerance of the spread to being adjusted, merely 
because of its size.