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Ratio Call Write

  • Combination of covered calls and naked calls
  • Sell more calls than are covered by stocks owned. Example, 2 calls for 100 stocks owned
  • Has two sided risk, if stock rises loss on uncovered call, if stock drops loss on the stock owned
  • Downside protection equal to the premium from two calls, upside protection will be provided by rise in stock value
  • Profit when stock remains within this up/down range
  • High probability of limited profit
  • Profit range should be wide enough in relation to volatility of stock and break even points should encompass next striking prices
  • If support and resistance lie within range, stock is more likely to stay in range
  • Could write calls out of money to be more bullish/bearish
  • Another way is to alter ratio. More calls for bearish, more stocks for bullish

2:1 ratio call

  • Max profit = strike - stock price + 2*call premium
  • Downside break even = strike - max profit = stock price - 2*call price
  • Upside break even = strike price + max price

Variable ratio call

  • If stock price is midway between strikes, a regular 2:1 ratio call will not be neutral (same upside/downside range)
  • In this case, sell one ITM and one OTM call. Max profit will result anywhere between the two strikes.
  • Max profit is lower than regular 2:1 but has higher probability of max profit.
  • Also called trapezoidal hedge