Ratio call spread question

Discussion in 'Options' started by nravo, Dec 28, 2007.

  1. nravo


    Why is this a superior trade to selling a naked call. If, for example, you write two OTM and buy one ATM, you are still naked one OTM. How much of a hedge is that single long and capped call? Is it worth giving up the extra premium of a second naked call? Or just doing one naked? The risk reward thing of the ratio spreads, puts or calls, seems overblown to me. What am I missing?

    Secondly, is there an advantage to writing the ATM call in the near month and writing in the next two months? Or vice versa, making it a calendar ratio call spread, I guess.
  2. bt116


    its really just about looking at your greeks. if you sell 1 naked call, you're naked all of the greeks that come with it. you have to decide what it is you're trying to hedge out. are you trying to hedge out price sensitivity (delta)? you can hedge out your delta risk by buying back some underlying (or buy some options in a ratio that will take your delta back to 0) but thats about it as far as your hedging goes, plus you'll have to re-hedge often to stay "delta neutral".

    selling calls, and then buying back calls of a different strike is going to give you some hedging to all the greeks, but you need to figure out what you want to stay neutral on. most people talk about delta when they are hedging, but there are people that subscribe to hedging other greeks (vega, gamma, etc.) as well.
  3. Prevail

    Prevail Guest

    deltas can be similar but max profit of the rs is higher.
  4. (1) The ratio is a "better" trade when done at the proper time. Done as you suggest, it has a neutral-bullish bias. The short-ATM-call only has a neutral bias. (2) Using "Cottle-speak", your ratio-spread is a combination of an ATM-bull-call-spread plus a short-OTM-call compared to the short-ATM-call. Your upside breakeven is pushed farther up. (3) If the strike prices of both sides of the ratio are the same, you're left with a short-call.............confirmation of the profound!
  5. What you're missing is that these two strategies provide different risk/reward spectrums. Just because there's one naked call in each position does not mean that they provide similar results.

    There is a possible advantage to everything that you do just as there is a possible disadvantage.