148 
FIGURE 6-1. 
Ratio write (2: 1 ). 
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Part II: Call Option Strategies 
Stock Price at Expiration 
a 3- or 6-month time period. Consequently, this strategy has a rather high probabili­
ty of making a limited profit. The profit in this example would, of course, be reduced 
by commission costs and margin interest charges if the stock is bought on margin. 
Before discussing the specifics of ratio writing, such as investment required, 
selection criteria, and follow-up action, it may be beneficial to counter two fairly 
common objections to this strategy. The first objection, although not heard as fre­
quently today as when listed options first began trading, is "Why bother to buy 100 
shares of stock and sell 2 calls? You will be naked one call. Why not just sell one 
naked call?" The ratio writing strategy and the naked writing strategy have very little 
in common except that both have upside risk. The profit graph for naked writing 
(Figure 5-1) bears no resemblance to the roof-shaped profit graph for a ratio write 
(Figure 6-1). Clearly, the two strategies are quite different in profit potential and in 
many other respects as well. 
The second objection to ratio writing for the conservative investor is slightly 
more valid. The conservative investor may not feel comfortable with a position that 
has risk if the underlying stock moves up in price. This can be a psychological detri­
ment to ratio writing: When stock prices are rising and everyone who owns stocks is 
happy and making profits, the ratio writer is in danger of losing money. However, in 
a purely strategic sense, one should be willing to assume some upside risk in 
exchange for larger profits if the underlying stock does not rise heavily in price. The