Chapter 11: Ratio Call Spreads 215 
These two philosophies are not mutually exclusive. The strategist who uses ratio 
spreads without regard for whether they are debit or credit spreads will generally 
have a broader array of spreads to choose from and will also be able to assume a more 
neutral posture on the stock. The spreader who insists on generating credits only will 
be forced to establish spreads on which his return will be slightly smaller if the under­
lying stock remains relatively unchanged. However, he will not have to worry about 
downside defensive action, since he has no risk to the downside. The third philoso­
phy, the "delta spread," is described after the next section, in which the uses of ratios 
other than 2: 1 are described. 
ALTERING THE RATIO 
Under either of the two philosophies discussed above, the strategist may find that a 
3:1 ratio or a 3:2 ratio better suits his purposes than the 2:1 ratio. It is not common 
to write in a ratio of greater than 4: 1 because of the large increase in upside risk at 
such high ratios. The higher the ratio that is used, the higher will be the credits of 
the spread. This means that the profits to the downside will be greater if the stock 
collapses. The lower the ratio that is used, the higher the upside break-even point will 
be, thereby reducing upside risk. 
Example: If the same prices are used as in the initial example in this chapter, it will 
be possible to demonstrate these facts using three different ratios (Table 11-3): 
XYZ common, 44; 
XYZ April 40 call, 5; and 
XYZ April 45 call, 3. 
TABLE 11-3. 
Comparison of three ratios. 
Price of spread 
(downside risk) 
Upside break-even 
Downside break-even 
Maximum profit 
3:2 Ratio: 
Buy 2 April 40's 
Sell 3 April 45's 
1 debit 
54 
401/2 
9 
2:1 Ratio: 3:1 Ratio: 
By 1 April 40 Buy 1 April 40 
Sell 2 April 45's Sell 3 April 45's 
1 credit 4 credit 
51 49½ 
None None 
6 9