Ratio Call Write

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The Ratio Call Write is a neutral strategy in options trading in which the options trader owns a holding of the underlying stock and sells more calls than shares owned. It is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock price will experience little volatility in the near term.

A 2:1 call ratio write can be implemented by selling 2 at-the-money calls for every 100 shares owned.

Limited Profit Potential

Maximum profit for the Ratio Call Write is limited and is made when the underlying stock price at expiration is at the strike price of the options sold. At this price, both the written calls expire worthless while the value of the long stock position remains unchanged. As such, the options trader gets to keep all of the premiums received when putting on the trade. Thus, maximum profit is equal to the premiums received from the sale of call options.

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Unlimited Risk Potential

Loss occurs when the stock price makes a strong move to the upside or downside beyond the upper and lower breakeven points. There is no limit to the maximum possible loss for the Ratio Call Write.

Breakeven Point(s)

There are 2 break-even points for the Ratio Call Write position. The breakeven points can be calculated using the following formulae.

Using the graph shown above, since the maximum profit is $400, the maximum profit expressed in points is therefore equal to 4. Therefore, upper breakeven is at $49 while lower breakeven is at $41.

Example

Suppose XYZ stock is trading at $45 in June. An options trader executes a 2:1 Ratio Call Write strategy by buying 100 shares of XYZ stock for $4500 and selling two at-the-money JUL 45 calls for $200 each for a total of $400.

On expiration in July, if XYZ stock is still trading at $45, both the JUL 45 calls expire worthless while the long stock position is still worth $4500. At this point, the options trader is positive $400 in the money because of the premiums earned. He can then choose to enter another ratio write or sell the shares and take profit.

If XYZ stock rallies and is trading at $49 on expiration in July, all the call options will expire in the money. The two written JUL 45 call are now worth $400 each. This $800 loss is completely offset by the $400 appreciation of his long stock position and the $400 in premiums he received earlier. Therefore, he achieves breakeven at $49.

Beyond $49 though, there will be no limit to the loss possible. For example, at $60, each written JUL 45 call will be worth $1500, resulting in a combined loss of $3000 on the short position. Meanwhile, his long stock position has only appreciated by $1500 and together with the $400 in premium received, the options trader still need to come up with another $1100 to close the position.

Using the formula for computing the breakeven point, we calculated the lower breakeven point to be $41. At $41, all the call options expire worthless. However, his long stock position also suffers a loss of $400 in value but this loss is offset by the $400 in premiums earned. Therefore, there is breakeven at $41.

Below $41 however, there is no limit to the potential loss. For example, if the stock price is trading at $30 on expiration, while all the call options expire worthless, the long stock position suffers a $1500 drop in value. Even with the $400 in premiums to offset the loss, the options trader still suffers a $1100 loss.

These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.

Commissions

For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.

For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.

Similar Strategies

The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.

Variable Ratio Write

Short Strangle (Sell Strangle)

Short Straddle (Sell Straddle)

Variable Ratio Write

When the underlying stock price is between two strike prices and at-the-money calls cannot be written, the Variable Ratio Write can be used instead.

Ratio Put Write

A similar ratio write strategy that is constructed using puts and short stock instead is known as the Ratio Put Write. It has the same profit potential as the Ratio Call Write but it is an inherently inferior strategy.

Before expiration and assignment

The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.