Expanding the Ratio

The ratio calendar spread can be expanded into an even more complex strategy through employment of the ratio calendar combination spread. This strategy places another dimension to the ratio calendar spread by adding a box spread to it.

The net result of these transactions is a receipt of $100, before calculation of trading charges. This complex combination involves 2-to-1 ratios between short and long positions on both sides (two short option positions for each long option position). In the event of unfavorable price movements in either direction, you risk exercise on at least a segment of this overall strategy.

The ideal price change pattern would enable you to close parts of the total combination at a profit, while leaving other parts open. Short positions should be closed in advance of long positions, given their least partial coverage against exercise. When prices move in one direction and then reverse and go the other way, it is called a price whipsaw. For the more complex options strategies, whipsaws can create ideal profit opportunities, or cause complete chaos—all depending on the timing, duration, and direction of the whipsaw.

[caption id="attachment_12564" align="aligncenter" width="420"]Example of ratio calendar combination spread. Example of ratio calendar combination spread.[/caption]


Doubling Up Calls and Puts: As illustrated in Figure above, you open the following option positions:
  • Buy one June 30 call at 3 (pay $300).
  • Sell two March 30 calls at 1.75 (receive $350).
  • Buy one September 25 put at 0.75 (pay $75).
  • Sell two June 25 puts at 0.625 (receive $125).
Because trading fees add up quickly, any combination using only a small number of options is a costly strategy. Considering the risk exposure, potential profits would not justify the action in many cases; the previous example is a case in point. However, for the purpose of illustration, this shows how the strategy works. In practice, such strategies would be more likely to involve much larger numbers of option contracts, thus more money—and more risk exposure.

Exercise risk is reduced when you own shares in the underlying stock, providing full or partial coverage against short call exercise. For example, when writing two calls and buying one, the risk of a price increase is eliminated if you also own 100 shares. Those shares cover one call, and the other short call is covered by the long call.


Watching the Clock: A complete ratio calendar combination spread with defined profit and loss zones is shown in Figure below. In this example, you open the following positions:
  • Buy one July 40 call for 6 (-$600).
  • Sell two April 40 calls for 3 (+$600).
  • Buy one October 35 put for 1 (-$100).
  • Sell two July 35 puts for 2 (+$400).
Net proceeds in this example are $300.

[caption id="attachment_12565" align="aligncenter" width="417"]Ratio calendar combination spread profit and loss zones. Ratio calendar combination spread profit and loss zones.[/caption]

This example consists of two separate ratio calendar spreads, boxed together. Profits would result if the stock's market value were to move in either direction, whereas losses are limited. Three separate expiration dates are involved. One danger in this elaborate strategy is that, as earlier options expire, later open positions become exposed to uncovered option exercise, so risks are increased. This situation can be reversed—so that chances for profits are greater—by building a combination using later-expiring long positions instead of short positions. Table below provides a breakdown of profit and loss produced at various price levels based on the example.

PriceApril 40 CallJuly 40 CallJuly 35 PutOct. 35 PutTotal

Profits/Losses for Ratio Calendar Combination Spread Example

$47+$100-$800$ 0+$400-$300
460- 6000+400- 200
45- 100-4000+ 400- 100
44- 200- 2000+4000
43- 30000+400+ 100
42- 400+ 2000+400+ 200
41- 500+ 4000+400+ 300
40- 600+ 6000+400+ 400
39- 600+ 6000+400+ 400
38- 600+ 6000+400+ 400
37- 600+ 6000+400+ 400
36- 600+ 6000+400+ 400
35- 600+ 6000+400+ 400
34- 600+ 6000+200+ 200
33- 600+ 600+ 1000+ 100
32- 600+ 600+ 200-2000
31- 600+ 600+ 300-400- 100
30- 600+ 600+ 400-600- 200
29- 600+ 600+ 500-800- 300
28- 600+ 600+ 500-1,000- 500
27- 600+ 600+ 500-1,200- 700
26- 600+ 600+ 500-1,400- 900
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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