Chapter 6: Ratio Call Writing 167 
the protective points even closer together. Thus, as the position continues to improve 
over time, the writer should be constantly "telescoping" his action points and finally 
roll out to the next expiration series. This is generally the more prudent move, 
because the commissions to sell stock to close the position and then buy another 
stock to establish yet another position may prove to be prohibitive. In summary, then, 
as a ratio write nears expiration, the writer should be concerned with an ever-nar­
rowing range within which his profits can grow but outside of which his profits could 
dissipate if he does not take action. 
COMMENTS ON DELTA-NEUTRAL TRADING 
Since the concept of delta-neutral positions was introduced in this chapter, this is 
an appropriate time to discuss them in a general way. Essentially, a delta-neutral 
position is a hedged position in which at least two securities are used - two or more 
different options, or at least one option plus the underlying. The deltas of the two 
securities offset each other so that the position starts out with an "equivalent stock 
position" (ESP) of 0. Another term for ESP is "position delta." Thus, in theory, 
there is no price risk to begin with; the position is neutral with respect to price 
movement of the underlying. That definition lasts for about a nanosecond. 
As soon as time passes, or the stock moves, or implied volatility changes, the 
deltas change and therefore the position is no longer delta-neutral. Many people 
seem to have the feeling that a delta-neutral position is somehow one in which it is 
easy to make money without predicting the price direction of the underlying. That is 
not true. 
Delta-neutral trading is not "easy": Either (1) one assumes some price risk as 
soon as the stock begins to move, or (2) one keeps constantly adjusting his deltas to 
keep them neutral. Method 2 is not feasible for public traders because of commis­
sions. It is even difficult for market-makers, who pay no commissions. Most public 
practitioners of delta-neutral trading establish a neutral position, but then refrain 
from adjusting it too often. 
A common mistake that novice traders make with delta-neutral trading is to 
short options in a neutral manner, figuring that they have little exposure to price 
change because the position is delta-neutral. However, a sizeable move by the under­
lying (which often happens in a short period of time) ruins the neutrality of the posi­
tion and inevitably costs the trader a lot of money. A simple example: If one sells a 
naked straddle (i.e., he sells a naked put and a naked call with both having the same 
striking price) with the stock initially just below the strike price, that's a delta-ne~tral