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TABLE 11-2. 
Ratio write and ratio spread compared. 
Profit range 
Maximum profit 
Downside risk 
Upside risk 
Initial investment 
Ratio Write: 
Buy XYZ of 50 and 
Sell 2 July SO's at 5 
40 to 60 
10 points 
40 points 
40 points 
$3,000 
Part II: Call Option Strategies 
Ratio Spread: 
Buy 1 July 40 of 11 and 
Sell 2 July SO's at 5 
41 to 59 
9 points 
1 point 
Unlimited 
$1,600 
In Chapter 6, it was pointed out that ratio writing was one of the better strate­
gies from a probability of profit viewpoint. That is, the profit potential conforms well 
to the expected movement of the underlying stock. The same statement holds true 
for ratio spreads as substitutes for ratio writes. In fact, the ratio spread may often be 
a better position than the ratio write itself, when the long call can be purchased with 
little or no time value premium in it. 
RATIO SPREAD FOR CREDITS 
The second philosophy of ratio spreads is to establish them only for credits. 
Strategists who follow this philosophy generally want a second criterion fulfilled also: 
that the underlying stock be below the striking price of the written calls when the 
spread is established. In fact, the farther the stock is below the strike, the more 
attractive the spread would be. This type of ratio spread has no downside risk 
because, even if the stock collapses, the spreader will still make a profit equal to the 
initial credit received. This application of the ratio spread strategy is actually a sub­
case of the application discussed above. That is, it may be possible both to buy a long 
call for little or no time premium, thereby simulating a ratio write, and also to be able 
to set up the position for a credit. 
Since the underlying stock is generally below the maximum profit point when 
one establishes a ratio spread for a credit, this is actually a mildly bullish position. 
The investor would want the stock to move up slightly in order for his maximum prof­
it potential to be realized. Of course, the position does have unlimited upside risk, so 
it is not an overly bullish strategy.