364 Part Ill: Put Option Strategies 
the spread with puts that are too deeply in-the-money, for this reason. While being 
put will not necessarily change the profitability of the spread, it will mean increased 
commission costs and margin charges for the customer, who must buy the stock upon 
assignment. 
A LOGICAL EXTENSION (THE RATIO CALENDAR COMBINATION) 
The previous section demonstrated that ratio put calendar spreads can be attractive. 
The ratio call calendar spread was described earlier as a reasonably attractive strate­
gy for the bullish investor. A logical combination of these two types of ratio calendar 
spreads (put and call) would be the ratio combination - buying a longer-term out-of­
the-money combination and selling several near-term out-of-the-money combina­
tions. 
Example: The following prices exist: 
XYZ common: 55 
XYZ January 50 put: 
XYZ January 60 call: 
XYZ April 50 put: 2 
XYZ April 60 call: 5 
One could sell the near-term January combination (January 50 put and January 60 
call) for 5 points. It would cost 7 points to buy the longer-term April combination 
(April 50 put and April 60 call). By selling more January combinations than April com­
binations bought, a ratio calendar combination could be established. For example, 
suppose that a strategist sold two of the near-term January combinations, bringing in 
10 points, and simultaneously bought one April combination for 7 points. This would 
be a credit position, a credit of 3 points in this example. If the near-term, out-of-the­
money combination expires worthless, a guaranteed profit of 3 points will exist, even 
if the longer-term options proceed to expire totally worthless. If the near-term com­
bination expires worthless, the longer-term combination is owned for free, and a large 
profit could result on a substantial stock price movement in either direction. 
Although this is a superbly attractive strategy if the near-term options do, in 
fact, expire worthless, it must also be monitored closely so that large losses do not 
occur. These large losses would be possible if the stock broke out in either direction 
too quickly, before the near-term options expire. In the absence of a technical opin­
ion on the underlying stock, one can generally compute a stock price at which it 
might be reasonable to take follow-up action. This is a similar analysis to the one