25 lines
1.8 KiB
Plaintext
25 lines
1.8 KiB
Plaintext
Ratio Call Writing
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Two basic types of call writing have been described in previous chapters: covered call
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writing, in which one owns the underlying stock and sells a call; and naked call writ
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ing. Ratio writing is a combination of these two types of positions.
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THE RATIO WRITE
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Simply stated, ratio call writing is the strategy in which one owns a certain number
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of shares of the underlying stock and sells calls against more shares than he owns.
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Thus, there is a ratio of calls written to stock owned. The most common ratio is the
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2:1 ratio, whereby one owns 100 shares of the underlying stock and sells 2 calls. Note
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that this type of position involves writing a number of naked call options as well as a
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number of covered options. This resulting position has both downside risk, as does a
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covered write, and unlimited upside risk, as does a naked write. The ratio write gen
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erally wilI provide much larger profits than either covered writing or naked writing if
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the underlying stock remains relatively unchanged during the life of the calls.
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However, the ratio write has two-sided risk, a quality absent from either covered or
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naked writing.
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Generally, when an investor establishes a ratio write, he attempts to be neutral
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in outlook regarding the underlying stock. This means that he writes the calls with
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striking prices closest to the current stock price.
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Example: A ratio write is established by buying 100 shares of XYZ at 49 and selling
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two XYZ October 50 calls at 6 points each. If XYZ should decline in price and be
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anywhere below 50 at October expiration, the calls will expire worthless and the
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writer will make 12 points from the sale of the calls. Thus, even if XYZ drops 12
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points to a price of 37, the ratio writer will break even. The stock loss of 12 points
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