Ratio Call Write

DEFINITION of 'Ratio Call Write'

An option strategy in which an investor owns shares in the underlying stock and writes more at-the-money call options than the amount of underlying shares owned. The goal of a ratio call write is to capture the premiums received by the option sale. The call writer hopes that there is little volatility in the underlying stock over the same period..

BREAKING DOWN 'Ratio Call Write'

In ratio call writing, the ratio represents the amount of options sold for every 100 shares owned in the underlying stock. For example, a 3:1 ratio call write implies writing three call option contracts (a total of 300 call options) and being long one hundred shares of the asset. The payoff from holding the asset and writing the calls resembles a reverse straddle.

The profit range for ratio call writes is often very narrow. A large drop in price may end up costing the trader a considerable sum of money. If the price of the underyling shares increases too much, the trader will lose. There is no limit to the potential downside with an increasing underlying price.

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