484 Part IV: Additional Considerations 
The risk trader can also use the neutral spread ratio to his advantage. This con­
cept was illustrated several times in previous chapters describing ratio writing, ratio 
spreads, and straddle writes. Ratio spreads are quite popular with member firm 
traders and floor traders. Recall that a ratio spread consists of buying options at acer­
tain strike, and selling more options further out-of-the-money. The hedge ratios can, 
of course, be used by the trader, or by a public customer, to initially establish a neu­
tral position. Perhaps more important, the hedge ratio can also be used as a follow­
up action to keep the position neutral after the stock changes in price. This strategy 
is the "delta spread" described in Chapter 11. 
The risk trader is not attempting to establish the spread with the idea of mini­
mizing risk for small stock movements. Rather, he is looking to make a profit, but 
would prefer to remain as neutral as possible on the underlying stock. He is imple­
menting a risk strategy that has a neutral outlook on the underlying stock. He is sell­
ing much more time value premium than he is buying. 
Example: The purchase of 15 January 30 calls and the sale of 30 January 35 calls - a 
ratio call spread - may be a position taken for profit potential. It would be a neutral 
position if the deltas were .60 and .30, for example. This spread would do best if the 
stock were at exactly 35 at expiration. However, if the stock rose quickly before expi­
ration, the spread ratio would decrease from 2:1 to perhaps 3:2. That is, the neutral 
ratio between the January 30 call and the January 35 call should be 3 short January 
35's to 2 long January 30's. If the trader wants to balance his position, he could buy 5 
more January 30's, giving him a total of 20 long versus the 30 short January 35's that 
he originally sold. Conversely, if the stock dropped in price, the neutral spread ratio 
might increase, indicating that more calls should be sold. For example, if this stock 
declines, the neutral ratio might be 3:1. In that case, 15 more January 35's could be 
sold, making the position short 45 calls versus 15 long calls, which would produce the 
neutral 3:1 ratio. 
It would not be proper to adjust the ratio constantly, because the frequent 
whipsaw losses on trading movements would wipe out the profit potential of the posi­
tion. However, the trader may want to pick out points, in advance, at which he wants 
to reevaluate his position before something drastic goes wrong. For example, if the 
foregoing spread were established with the stock at a price of 30, the spreader might 
want to readjust at 33 or 27, whichever comes first. 
By monitoring the spread using the hedge ratio, the trader may also be able to 
discern whether he has established too bullish or too bearish a position. 
Example: The trader starts with the example described above - long 15 January 30 
calls and short 30 January 35 calls - when the hedge ratios were .60 and .30, respec-