Variable Ratio Write

Variable Ratio Write

A variable ratio write is an options strategy in which an investor holds a long position in an underlying stock and sells (writes) more call options than the number of 100-share lots owned, typically at different strike prices. The goal is to collect option premiums as additional income on a stock the trader expects to remain relatively unchanged in the short term.

Key points

• Structure: Long the underlying stock + short multiple calls at varying strikes (a ratio greater than 1:1).
• Objective: Generate income from premiums while retaining the stock position.
• Profit potential: Limited to the premiums collected (and any modest stock appreciation up to certain strikes).
• Risk: Potentially unlimited loss if the stock rises sharply (because short calls exceed the long stock position). Losses from a large downward move are limited by the stock falling to zero.
• Suitability: Advanced traders familiar with option Greeks and position management.

How it works

“Ratio” refers to the number of short call contracts relative to 100-share lots owned. For example, a 2:1 ratio means owning 100 shares and selling 200 call options (i.e., two short calls per 100 shares).

A variable ratio write often uses short calls at different strikes (for example, one in-the-money and one out-of-the-money). The combined premium received creates a zone of limited profitability if the stock remains between certain levels through expiration. Outside that zone, losses can occur.

Payoff and risk profile

• Maximum profit generally equals the total premiums collected plus any stock gains up to the point(s) of maximum profit.
• Upside risk can be unlimited because the number of short calls can exceed the protection provided by the long stock. If the stock rallies sharply, losses on the short calls can exceed gains on the owned shares.
• Downside risk is limited to the decline in value of the long stock position (down to zero), offset partially by the premiums received.

Breakeven points (general)

Breakeven levels depend on the strikes chosen and the net premium collected (expressed per share). For a position with a lower short-call strike K_L, a higher short-call strike K_H, and net premium per share P:
* Lower breakeven ≈ K_L − P
* Upper breakeven ≈ K_H + P

These are general approximations; exact breakeven calculations depend on the precise contract counts, strikes, and net premium per share.

Example

An investor owns 1,000 shares of XYZ at $100 and expects little movement over two months. They sell 30 call contracts at a $110 strike (each contract = 100 shares), receiving $0.25 per share in premium.

• Contracts sold: 30 → exposure = 3,000 shares short calls
• Premium collected: $0.25 × 3,000 = $750
• If XYZ remains below $110 at expiration, the calls expire worthless and the investor keeps the $750 premium.
• Upper breakeven (approx.): $110 + $0.25 = $110.25. If the stock rises above this level, losses on the short calls will more than offset gains on the 1,000 shares owned because the short-call exposure (3,000 shares) exceeds the long position (1,000 shares).

When to use—and warnings

• Use only if you have a neutral-to-slightly-bearish view on the stock and enough experience to manage complex options positions.
• Be prepared to manage or close positions if the stock moves sharply. Rolling options, buying back some short calls, or hedging may be necessary.
• Understand margin requirements and the potential for large losses on the upside.

Bottom line

A variable ratio write can generate extra income on a held stock, but it transfers significant upside risk to the trader because the number of short calls can exceed the long-stock coverage. It is a strategy for experienced options traders who can actively monitor and manage positions.