Otapter 6: Ratio Call Writing 147 
would be offset by a 12-point gain on the calls. As with any strategy in which calls are 
sold, the maximum profit occurs at the striking price of the written calls at expiration. 
In this example, if XYZ were at 50 at expiration, the calls would still expire worthless 
for a 12-point gain and the writer would have a 1-point profit on his stock, which has 
moved up from 49 to 50, for a total gain of 13 points. This position therefore has 
ample downside protection and a relatively large potential profit. Should XYZ rise 
above 50 by expiration, the profit will decrease and eventually become a loss if the 
stock rises too far. To see this, suppose XYZ is at 63 at October expiration. The calls 
will be at 13 points each, representing a 7-point loss on each call, because they were 
originally sold for 6 points apiece. However, there would be a 14-poirit gain on the 
stock, which has risen from 49 to 63. The overall net is a break-even situation at 63 -
a 14-point gain on the stock offset by 14 points ofloss on the options (7 points each). 
Table 6-1 and Figure 6-1 summarize the profit and loss potential of this example at 
October expiration. The shape of the graph resembles a roof with its peak located at 
the striking price of the written calls, or 50. It is obvious that the position has both 
large upside risk above 63 and large downside risk below 37. Therefore, it is imper­
ative that the ratio writer plan to take follow-up action if the stock should move out­
side these prices. Follow-up action is discussed later. If the stock remains within the 
range 37 to 63, some profit will result before commission charges. This range 
between the downside break-even point and the upside break-even point is called the 
profit range. 
This example represents essentially a neutral position, because the ratio writer 
will make some profit unless the stock falls by more than 12 points or rises by more 
than 14 points before the expiration of the calls in October. This is frequently an 
attractive type of strategy to adopt because, normally, stocks do not move very far in 
TABLE 6-1. 
Profit and loss at October expiration. 
XYZ Price at Stock Call Profit Total 
Expiration Profit Price on Calls Profit 
30 -$1,900 0 +$1,200 -$ 700 
37 - 1,200 0 + 1,200 0 
45 400 0 + 1,200 + 800 
50 + 100 0 + 1,200 + 1,300 
55 + 600 5 + 200 + 800 
63 + 1,400 13 - 1,400 0 
70 + 2,100 20 - 2,800 - 700