Ratio Strategies/Options Strategies Summary

Question 1

A customer buys 100 shares of ABC stock at $60 and sells 2 ABC Feb 60 Calls @ $4. This is a:

A. ratio call write
B. covered call write
C. ratio call spread
D. butterfly spread

Answer 1

The best answer is A.

If a customer who is long stock sells call contracts against the stock position, then as long as the contract amount does not exceed the long stock position, the call writer is “covered.” This means that if the short call is exercised, the customer already has the stock for delivery. Hence the customer is covered against the risk of having to go to the market to buy the stock at a sky high price to make delivery. If a customer sells more call contracts than the stock position owned, this is a “ratio” call write. In this example, the customer is selling calls against the stock position at a 2:1 ratio.

Question 2

A customer buys 100 shares of ABC stock at $50 and sells 2 ABC Jan 50 Calls @ $5. This is a:

A. short straddle
B. ratio call write
C. covered call write
D. ratio call spread

Answer 2

The best answer is B.

If a customer who is long stock sells call contracts against the stock position, then as long as the contract amount does not exceed the long stock position, the call writer is “covered.” This means that if the short call is exercised, the customer already has the stock for delivery. Hence the customer is covered against the risk of having to go to the market to buy the stock at a sky high price to make delivery. If a customer sells more call contracts than the stock position owned, this is a “ratio” call write. In this example, the customer is selling calls against the stock position at a 2:1 ratio.