Chapter 6: Ratio Call Writing 149 
covered writer has upside protection all the way to infinity; that is, he has no upside 
risk at all. This cannot be the mathematically optimum situation, because stocks 
never rise to infinity. Rather, the ratio writer is engaged in a strategy that makes its 
profits in a price range more in line with the way stocks actually behave. In fact, if 
one were to try to set up the optimum strategy, he would want it to make its most 
profits in line with the most probable outcomes for a stock's movement. Ratio writ­
ing is such a strategy. 
Figure 6-2 shows a simple probability curve for a stock's movement. It is most 
likely that a stock will remain relatively unchanged and there is very little chance that 
it will rise or fall a great distance. Now compare the results of the ratio writing strat­
egy with the graph of probable stock outcomes. Notice that the ratio write and the 
probability curve have their "peaks" in the same area; that is, the ratio write makes 
its profits in the range of most likely stock prices, because there is only a small chance 
that any stock will increase or decrease by a large amount in a fixed period of time. 
The large losses are at the edges of the graph, where the probability curve gets very 
low, approaching zero probability. It should be noted that these graphs show the prof­
it and probability at expiration. Prior to expiration, the break-even points are closer 
to the original purchase price of the stock because there will still be some time value 
premium remaining on the options that were sold. 
FIGURE 6-2. 
Stock price probability curve overlaid on profit graph of ratio 
write. 
+$1,300 Probability 
Curve 
Stock Price