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Ratio write

Selling more calls than the shares you own — for example two calls against 100 shares — so part of the short position is naked.

A covered call sells one call per 100 shares. A ratio write sells more, which increases income and introduces genuine upside risk, because the extra contract has no stock behind it. Above the strike the position gains from the shares but loses from the uncovered call, and eventually the loss wins.

Requirements reflect this. The uncovered contract is margined as a naked-call and needs the corresponding option-approval-level. Ratio writing is a legitimate income technique in range-bound names and a disaster in a takeover candidate.

Example: you own 100 XYZ at $50 and sell two 45-day $55 calls at $0.80 each, collecting $160. Break-even to the upside is around $61.60. At $70 the shares gain $2,000 and the two short calls lose $3,000, netting a $840 loss including premium.

Related: covered-call, ratio-spread, naked-call, undefined-risk

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.