Chapter 24: Ratio Spreads Using Puts 365 
described for ratio call calendar spreads in Chapter 12. Suppose the stock in this 
example began to rally. There would be a point at which the strategist would have to 
pay 3 points of debit to close the call side of the combination. That would be his 
break-even point. 
Example: With XYZ at 65 at January expiration (5 points above the higher strike of 
the original combination), the near-term January 60 call would be worth 5 points and 
the longer-term April 60 call might be worth 7 points. If one closed the call side of 
the combination, he would have to pay 10 points to buy back two January 60 calls, 
and would receive 7 points from selling out his April 60. This closing transaction 
would be a 3-point debit. This represents a break-even situation up to this point in 
time, except for commissions, since a 3-point credit was initially taken in. The strate­
gist would continue to hold the April 50 put (the January 50 put would expire worth­
less) just in case the improbable occurs and the underlying stock plunges below 50 
before April expiration. A similar analysis could be performed for the put side of the 
spread in case of an early downside breakout by the underlying stock. It might be 
determined that the downside break-even point at January expiration is 46, for exam­
ple. Thus, the strategist has two parameters to work with in attempting to limit loss­
es in case the stock moves by a great deal before near-term expiration: 65 on the 
upside and 46 on the downside. In practice, if the stock should reach these levels 
before, rather than at, January expiration, the strategist would incur a small loss by 
closing the in-the-money side of the combination. This action should still be taken, 
however, as the objective of risk management of this strategy is to take small losses, if 
necessary. Eventually, large profits may be generated that could more than compen­
sate for any small losses that were incurred. 
The foregoing follow-up action was designed to handle a volatile move by the 
underlying stock prior to near-term expiration. Another, perhaps more common, time 
when follow-up action is necessary is when the underlying stock is relatively 
unchanged at near-term expiration. If XYZ in the example above were near 55 at 
January expiration, a relatively large profit would exist at that time: The near-term 
combination would expire worthless for a gain of 10 points on that sale, and the 
longer-term combination would probably still be worth about 5 points, so that the 
unrealized loss on the April combination would be only 2 points. This represents a 
total (realized and unrealized) gain of 8 points. In fact, as long as the near-term com­
bination can be bought back for less than the original 3-point credit of the position, 
the position will show a total unrealized gain at near-term expiration. Should the gain 
be taken, or should the longer-term combination be held in hopes of a volatile move 
by the underlying stock? Although the strategist will normally handle each position