Chapter 6: Ratio Call Writing 163 
culation is that an entire, possibly complex option position can be reduced to one 
number. The ESP shows how the position will behave for short-term market move­
ments. 
Look again at the previous example of a ratio write. The position was long 300 
shares and short 5 options with a current delta of .80 after the stock had risen to 57. 
The ESP of the 5 October 50's is short 400 shares (5 x .80 x 100 shares per option). 
The position is also long 300 shares of stock, so the total ESP of this ratio write is 
short 100 shares. 
This figure gives the strategist a measure of perspective on his position. He now 
knows that he has a position that is the equivalent of being short 100 shares of XYZ. 
Perhaps he is bearish on XYZ and therefore decides to do nothing. That would be 
fine; at least he knows that his position is short. 
Normally, however, the strategist would want to adjust his position. Again 
returning to the previous example, he has several choices in reducing the ESP back 
to neutral. An ESP of O is considered to be a perfectly neutral position. Obviously, 
one could buy 100 shares of XYZ to reduce the 100-share delta short. Or, given that 
the delta of the October 50 call is .80, he could buy in 1.25 of these short calls (obvi­
ously he could only buy l; fractional options cannot be purchased). 
Later chapters include more discussions and examples using the ESP. It is a 
vital concept that no strategist who is operating positions involving multiple options 
should be without. The only requirement for calculating it is to know the delta of the 
options in one's position. Those are easily obtainable from one's broker or from a 
number of computer services, software programs, or Web sites. 
For investors who do not have the funds or are not in a position to utilize such 
a ratio adjusting strategy, there is a less time-consuming method of taking defensive 
action in a ratio write. 
USING STOP ORDERS AS A DEFENSIVE STRATEGY 
A ratio writer can use buy or sell stops on his stock position in order to automatical­
ly and unemotionally adjust the ratio of his position. This type of defensive strategy 
is not an aggressive one and will provide some profits unless a whipsaw occurs in the 
underlying stock. 
As an example of how the use of stop orders can aid the ratio writer, let us again 
assume that the same basic position was established by buying XYZ at 49 and selling 
two October 50 calls at 6 points each. This produces a profit range of 37 to 63 at expi­
ration. If the stock begins to move up too far or to fall too far, the ratio writer can 
adjust the ratio of calls short to stock long automatically, through the use of stop 
orders on his stock.