220 Part II: Call Option Strategies 
Example: Early in this chapter, when selection criteria were described, a neutral 
ratio was determined to be 16:10, with XYZ at 44. Suppose, after establishing the 
spread, that the common rallied to 4 7. One could use the current deltas to adjust. 
This information is summarized in Table 11-4. The current neutral ratio is approxi­
mately 14:10. Thus, two of the short April 45's could be bought closing. In practice, 
one usually decreases his ratio by adding to the long side. Consequently, one would 
buy two April 40's, decreasing his overall ratio to 16:12, which is 1.33 and is close to 
the actual neutral ratio of 1.38. The position would therefore be delta-neutral once 
more. 
An alternative way of looking at this is to use the equivalent stock position 
(ESP), which, for any option, is the multiple of the quantity times the delta times the 
shares per option. The last three lines of Table 11-4 show the ESP for each call and 
for the position as a whole. Initially, the position has an ESP of 0, indicating that it is 
perfectly delta-neutral. In the current situation, however, the position is delta short 
140 shares. Thus, one could adjust the position to be delta-neutral by buying 140 
shares of XYZ. If he wanted to use the options rather than the stock, he could buy 
two April 45's, which would add a delta long of 130 ESP (2 x .65 x 100), leaving the 
position delta short 10 shares, which is very near neutral. As pointed out in the above 
paragraph, the spreader probably should buy the call with the most intrinsic value -
the April 40. Each one of these has an ESP of 90 (1 x .9 x 100). Thus, if one were 
bought, the position would be delta short 50 shares; if two were bought, the total 
position would be delta long 40 shares. It would be a matter of individual preference 
whether the spreader wanted to be long or short the "odd lot" of 40 or 50 shares, 
respectively. 
TABLE 11-4. 
Original and current prices and deltas. 
XYZ common 
April 40 call 
April 45 call 
April 40 delta 
April 45 delta 
Neutral ratio 
April 40 ESP 
April 45 ESP 
Total ESP 
Original Situation 
44 
5 
3 
.80 
.50 
16:10 (.80/.50) 
800 long (l Ox .8 x 100) 
800 shrt ( 16 x .5 x l 00) 
0 (neutral) 
Current Situation 
47 
8 
5 
.90 
.65 
14:10 (.90/.65 = 1.38) 
900 long (10 x .9 x 100) 
l ,040 shrt ( 16 x .65 x l 00) 
140 shrt