The Ratio Write is an option strategy that involves stock ownership, but the stock holder does not expect much movement before option expiration.


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Strategy: Ratio Write, ATM

Ratio Write At the Money Option Graph

The Outlook: Neutral. Not expecting any dramatic move in the near term.

The Trade: Buy stock, sell twice the equivalent number of calls, at the strike price nearest the current stock price.

Gains when: Stock stays between the breakeven points.

Maximum Gain: Limited to the option credit (during the life of the options).

Loses when: Stock moves beyond one of the breakeven points.

Maximum Loss : Unlimited on both the downside and the upside.

Breakeven Calculation: Lower breakeven = strike price - option credit. Upper breakeven = strike price + option credit.

Advantages compared to stock: Increased leverage, less capital required, can gain from little or no movement in the stock price.

Disadvantages compared to stock: Unlimited loss is possible to the upside as well as the downside.

Volatility: after entry, increasing implied volatility is negative.

Time: after entry, the passage of time is positive if stock price is between the breakeven points.

Margin Requirement : Your broker will see a covered call, requiring no margin, plus naked short calls. You need a permission level to trade naked options, and the margin will be at least 10% of the strike price x the number of shares represented, but probably more. See the bottom of the page for an alternative.

Synthetic Equivalent: Short Puts and Short Calls at the ATM strike (A Straddle Sale).


  • Since this strategy has unlimited risk to the upside as well as the downside, you want to avoid volatile stocks, earnings dates, buyout candidates, etc. You would want to use stock and options in a large stable company, not likely to receive a buyout offer, and not in an earnings month.
  • This strategy might be suitable for someone experienced and successful with the Covered Call strategy. It amounts to bringing in twice the premium of an ATM Covered Call, having more "downside protection", and still being able to hold the stock IF the stock does not move much before expiration.
  • This is a "Delta-Neutral" type trade. The intent is to gain from the passage of time, and not from stock price movement.
  • The best time to enter this trade is when volatility is higher than normal. A higher than normal volatility means you will receive more for selling the two calls, and that will result in a wider spread between the breakeven points. It also increases the chances that the trade will gain from both the passage of time and a drop back to normal in the volatility.
  • A very similar strategy, with limited risk, is the Butterfly.


  • The trader using a Ratio Write is expecting the stock to do nothing until expiration. If the stock rises or falls, it is usually wise to exit the trade, taking less than the maximum possible loss. You might plan to exit if the stock got to either of the breakeven points at any time.
  • If the stock rises to the upper breakeven, taking a very small loss is possible by buying back one short call, and allowing the other short call to call you out of the stock at expiration. In the example trade, if the stock gets to $53.96 in two weeks, an options calculator shows the 50 strike call will be worth about $4.25. So you took in $396, spend $425, and your loss is just $29. This is not a guaranteed outcome however: the stock could whipsaw and cause a loss on the downside. It would be safer to exit the entire trade with a loss of about $58.
  • Like other Delta-Neutral trades, it can be a good idea to take gains early. If the stock is at $50 in two weeks, a gain of over $100 could be taken. Waiting another two weeks puts any gain at risk from smaller and smaller movements in the stock price.


  • If the stock rises to the upper breakeven, it is possible to buy more stock at that price, so that the position becomes two covered calls. If you allow yourself to get called out at expiration, the whole trade is a wash except for commissions. You took in $396 in premium and you will lose $396 on 100 shares.

It is possible to use this strategy if you do not have the option permission level to trade naked short options, but you do have the permission level to use spreads. This is accomplished by buying some very cheap protection for the upside, as shown in the graph below. The margin requirement on the example shown would be $1000 (100 shares uncovered (represented by 1 short call) x $10 difference in strike prices).

If you want to protect the downside as well, you are better off just using the Butterfly strategy, for much less of a total debit (or a credit, depending on the version used).

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