152 Part II: Call Option Strategies 
Example: The writer is buying 100 XYZ at 49 and selling 2 October 50 calls at 6 
points apiece. It was seen, by inspection, that the break-even points in the position 
are 37 on the downside and 63 on the upside. A mathematical formula allows one to 
quickly compute the break-even points for a 2:1 ratio write. 
Points of maximum profit = Strike price - Stock price + 2 x Call price 
Downside break-even point = Strike price - Points of maximum profit 
= Stock price - 2 x Call price 
Upside break-even point = Strike price + Points of maximum profit 
In this example, the points of maximum profit are 50 - 49 + 2 x 6, or 13. Thus, 
the downside break-even point would be 37 (50 - 13) and the upside break-even 
point would be 63 (50 + 13). These numbers agree with the figures determined ear­
lier by analyzing the position. 
This profit range is quite clearly wide enough to allow for defensive action 
should the underlying stock rise to the next highest strikes of 55 or 60, or fall to the 
next two lower strikes, at 45 and 40. In practice, a ratio write is not automatically a 
good position merely because the profit range extends far enough. Theoretically, 
one would want the profit range to be wide in relation to the volatility of the under­
lying stock. If the range is wide in relation to the volatility and the break-even 
points encompass the next higher and lower striking prices, a desirable position is 
available. Volatile stocks are the best candidates for ratio writing, since their pre­
miums will more easily satisfy both these conditions. A nonvolatile stock may, at 
times, have relatively large premiums in its calls, but the resulting profit range may 
still not be wide enough numerically to ensure that follow-up action could be taken. 
Specific measures for determining volatility may be obtained from many data serv­
ices and brokerage firms. Moreover, methods of computing volatility are present­
ed later in the chapter on mathematical applications, and probabilities are further 
addressed in the chapters on volatility trading. 
Technical support and resistance levels are also important in establishing the 
position. If both support and resistance lie within the profit range, there is a better 
chance that the stock will remain within the range. A position should not necessarily 
be rejected if there is not support and resistance within the profit range, but the 
writer is then subjecting himself to a possible undeterred move by the stock in one 
direction or the other. 
The ratio writer is generally a neutral strategist. He tries to take in the most 
time premium that he can to earn the premium erosion while the stock remains rel­
atively unchanged. If one is more bullish on a particular stock, he can set up a 2:1 
ratio write with out-of~the-money calls. This allows more room to the upside than to 
the downside, and therefore makes the position slightly more bullish. Conversely, if