# Varying the Number of Options

The ratio calendar spread involves the use of a different number of options on each side of the spread, plus different expiration dates. The strategy is interesting because it creates two separate profit and loss zone ranges, broadening the opportunity for interim profits.

If the stock is at \$54 at the point of expiration, you break even due to the ratio of four short calls and two long calls. Upon exercise, the two short calls will cost \$800âthe same amount that you received upon opening the ratio calendar spread.

If the price of stock is higher than \$54 per share, the loss occurs at the ratio of 4 to 2 (since you sold four calls and bought only two). If the May expiration date were to pass without exercise, the four short positions would be profitable, and you would still own the two August 50 calls.

#### Example

The Geometric Approach: You enter into a ratio calendar spread by selling four May 50 calls at 5, and buying two August 50 calls at 6. You receive \$800 net (\$2,000 received less \$1,200 paid) before transaction fees are deducted. You hope that between the time you open these positions and expiration, the underlying stock's market value will remain below striking price; that would produce a profit on the short side. Your breakeven is \$54 per share.

The profit and loss zones in this example are summarized in Figure below. Note that no consideration is given to transaction costs, time value of the longer-expiration premiums, or the outcome in the event of early exercise.

[caption id="attachment_12561" align="aligncenter" width="500"] Example of ratio calendar spread.[/caption]

Another complete ratio calendar spread strategy with defined profit and loss zones is summarized in Figure below and explained in the following example.

[caption id="attachment_12562" align="aligncenter" width="380"] Ratio calendar spread profit and loss zones.[/caption]

#### Example

A Complexity of Zones: You sell five June 40 calls at 5, and buy three September 40 calls at 7. Net proceeds are \$400. The short position risk is limited to the first expiration period, with potential losses partially covered by the longer-expiration long calls. If the stock's market value does not rise above the striking price of 40, the short calls will expire worthless.

Once the June expiration passes, the \$400 net represents pure profit, regardless of stock price movement after that date. However, if the stock's market value were to rise above the long calls' striking price, they would increase in value three points for each point of increase in the stock. The calls can also be sold at any point prior to expiration, to create additional profit.

Table below shows a summary of the values for this strategy at various stock price levels as of expiration. No time value is considered in this summary. If the stock remains at or below the \$40-per-share level, the ratio calendar spread will be profitable. However, that profit will be limited as long as all positions remain open.

Price June 40 Sept. 40 Total Profits/Losses for Ratio Calendar Spread Example \$50 -\$5,000 +\$3,000 -\$2,000 49 - 4,500 + 2,700 -1,800 48 - 4,000 + 2,400 -1,600 47 - 3,500 + 2,100 -1,400 46 - 3,000 + 1,800 -1,200 45 - 2,500 + 1,500 -1,000 44 - 2,000 + 1,200 - 800 43 - 1,500 +900 - 600 42 - 1,000 +600 - 400 41 -500 +300 - 200 40 + 2,500 - 2,100 + 400 39 + 2,500 - 2,100 + 400 38 + 2,500 - 2,100 + 400 Lower + 2,500 - 2,100 + 400
By Michael C. Thomsett
Michael Thomsett is a British-born American author who has written over 75 books covering investing, business and real estate topics.

Copyrighted 2020. Content published with author's permission.

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