160 Part II: Call Option Strategies 
situation could arise to the downside. If:X'YZ were to plunge from 49 to 20, the ratio 
writer would make a good deal of profit from the calls by rolling down, but may still 
have a larger loss in the stock itself than the call profits can compensate for. 
Many ratio writers who are large enough to diversify their positions into a num­
ber of stocks will continue to maintain 2:1 ratios on all their positions and will simply 
close out a position that has gotten out of hand by running dramatically to the upside 
or to the downside. These traders believe that the chances of such a dramatic move 
occurring are small, and that they will take the infrequent losses in such cases in 
order to be basically neutral on the other stocks in their portfolios. 
There is, however, a way to combat this sort of dramatic move. This is done by 
altering the ratio of the covered write as the stock moves either up or down. For 
example, as the underlying stock moves up dramatically in price, the ratio writer can 
decrease the number of calls outstanding against his long stock each time he rolls. 
Eventually, the ratio might decrease as far as 1:1, which is nothing more than a cov­
ered writing situation. As long as the stock continues to move in the same upward 
direction, the ratio writer who is decreasing his ratio of calls outstanding will be giv­
ing more and more weight to the stock gains in the ratio write and less and less weight 
to the call losses. It is interesting to note that this decreasing ratio effect can also be 
produced by buying extra shares of stock at each new striking price as the stock 
moves up, and simultaneously keeping the number of outstanding calls written con­
stant. In either case, the ratio of calls outstanding to stock owned is reduced. 
When the stock moves down dramatically, a similar action can be taken to 
increase the number of calls written to stock owned. Normally, as the stock falls, one 
would sell out some of his long stock and roll the calls down. Eventually, after the 
stock falls far enough, he would be in a naked writing position. The idea is the same 
here: As the stock falls, more weight is given to the call profits and less weight is given 
to the stock losses that are accumulating. 
This sort of strategy is more oriented to extremely large investors or to firm 
traders, market-makers, and the like. Commissions will be exorbitant if frequent rolls 
are to be made, and only those investors who pay very small commissions or who have 
such a large holding that their commissions are quite small on a percentage basis will 
be able to profit substantially from such a strategy. 
ADJUSTING WITH THE DELTA 
The delta of the written calls can be used to determine the correct ratio to be used in 
this ratio-adjusting defensive strategy. The basic idea is to use the call's delta to 
remain as neutral as possible at all times.