Chapter 12: Combining Calendar and Ratio Spreads 223 
term calls while buyingfewer of the intermediate-term or long-term calls. Since more 
calls are being sold than are being bought, naked options are involved. It is often pos­
sible to set up a ratio calendar spread for a credit, meaning that if the underlying 
stock never rallies above the strike, the strategist will still make money. However, 
since naked calls are involved, the collateral requirements for participating in this 
strategy may be large. 
Example: As in the bullish calendar spreads described in Chapter 9, the prices are: 
XYZ common, 45; 
XYZ April 50 call, l; and 
XYZ July 50 call, l½. 
In the bullish calendar spread strategy, one July 50 is bought for each April 50 sold. 
This means that the spread is established for a debit of½ point and that the invest­
ment is $50 per spread, plus commissions. The strategist using the ratio calendar 
/ spread has essentially the same philosophy as the bullish calendar spreader: The 
stock will remain below 50 until April expiration and may then rally. The ratio calen­
dar spread might be set up as follows: 
Buy 1 XYZ July 50 call at l½ 
Sell 2 XYZ April 50 calls at 1 each 
Net 
l½ debit 
2 credit 
½ credit 
Although there is no cash involved in setting up the ratio spread since it is done for 
a credit, there is a collateral requirement for the naked April 50 call. 
If the stock remains below 50 until April expiration, the long call - the July 50 
- will be owned free. After that, no matter what happens to the underlying stock, the 
spread cannot lose money. In fact, if the underlying stock advances dramatically after 
near-term expiration, large profits will accrue as the July 50 call increases in value. Of 
course, this is entirely dependent on the near-term call expiring worthless. If the 
underlying stock should rally above 50 before the April calls expire, the ratio calen­
dar spread is in danger of losing a large amount of money because of the naked calls, 
and defensive action must be taken. Follow-up actions are described later. 
The collateral required for the ratio calendar spread is equal to the amount of 
collateral required for the naked calls less the credit taken in for the spread. Since 
naked calls will be marked to market as the stock moves up, it is always best to allow 
enough collateral to get to a defensive action point. In the example above, suppose 
that one felt he would definitely be taking defensive action if the stock rallied to 53