Gopter 6: Ratio Call Writing 
FIGURE 6-3. 
Variable ratio write (trapezoidal hedge). 
+$600 
C: 
i $ 
al 
"' "' .3 
5 
;t: 
e 
0. 
$0 
Stock Price at Expiration 
Points of maximum profit = Total option premiums + Lower 
striking price - Stock price 
Downside break-even point = Lower striking price - Points of 
maximum profit 
Upside break-even point = Higher striking price + Points of 
maximum profit 
157 
Substituting the numbers from the example above will help to verify the formula. 
The total points of option premium brought in were 11 (8 for the October 60 and 3 
for the October 70). The stock price was 65, and the striking prices involved were 60 
and 70. 
Points of maximum profit = 11 + 60 - 65 = 6 
Downside break-even point= 60- 6 = 54 
Upside break-even point= 70 + 6 = 76 
Thus, the break-even points as computed by the formula agree with Table 6-5 and 
Figure 6-3. Nate that the formula applies only if the stock is initially between the two 
striking prices and the ratio is 2:1. If the stock is above both striking prices, the for­
mula is not correct. However, the writer should not be attempting to establish a vari­
able ratio write with two in-the-money calls.