The variable ratio write is a variant of the ratio write strategy in which the options trader owns a holding of the underlying stock and sells more calls than shares owned.
Buy 100 shares; Sell short 1 call at K1; Sell short 1 call at K2. K1 < K2 < … when strikes differ. Stock quantities illustrate standard 100-share options; match the actual contract multiplier and deliverable.
Payoff notation: S is the nonnegative underlying price at expiration; K1, K2, … are ascending strikes. D is the net entry debit per underlying unit, including stock cost and option cashflows (negative for a credit). Formulas exclude fees unless stated; multiply by the matched quantity.
Like the ratio write, it is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock price will experience little volatility in the near term.
Unlike the 2:1 ratio call write, which involves writing two at-the-money calls, the 2:1 variable ratio write involves writing one out-of-the-money call and one in-the-money call. As such, the variable ratio write has a lower profit potential but the profit zone is wider.
Profit potential
Profit is bounded for the stated stock/index position.
max(0, K1 − D) per underlying unit, before fees
Loss potential
Loss can increase without a finite upper bound as the underlying rises.
Unlimited as S increases without bound
Breakeven points
The breakeven depends on the entry cashflow and strike region. See the exact payoff and interval conditions below.
Referring to the graph shown above, since the maximum profit is $400, points of maximum profit is therefore equals to 4. Therefore, upper breakeven is at $54 while lower breakeven is at $36.
Example
Suppose XYZ stock is trading at $45 in June. An options trader executes a 2:1 variable ratio write by buying 100 shares of XYZ stock for $4500, selling one in-the-money JUL 40 call for $700 and selling another out-of-the-money JUL 50 call for $200. The total premiums received for putting on the trade is $900.
On expiration in July, if XYZ stock is still trading at $45, the long stock position is still worth $4500, the JUL 50 call expires worthless while the JUL 40 call expires in the money with $500 in intrinsic value. With $900 in premiums earned, buying back the short JUL 40 call for $500 still results in a $400 profit. This is the maximum profit and can be made when XYZ stock price is anywhere between $40 and $50.
If XYZ stock rallies and is trading at $54 on expiration in July, all the call options will expire in the money. The JUL 40 call is now worth $1400 while the JUL 50 call is worth $400. This $1800 loss is completely offset by the $900 appreciation of their long stock position and the $900 in premiums they received earlier. Therefore, they achieves breakeven at $54.
Beyond $54 though, there will be no limit to the loss possible. For example, at $70, the written JUL 40 call will be worth $3000 while the JUL 50 call will be valued at $2000, resulting in a combined loss of $5000 on the short position. Meanwhile, their long stock position has only appreciated by $2500 and together with the $900 in premium received, the options trader still need to come up with another $1600 to close the position.
Using the formula for computing the breakeven point, we calculated the lower breakeven point to be $36. At $36, all the call options expire worthless. However, their long stock position also suffers a loss of $900 in value but this loss is offset by the $900 in premiums earned. Therefore, there is breakeven at $36.
Below $36 however, there is no limit to the potential loss. For example, if the stock price is trading at $20 on expiration, while all the call options expire worthless, the long stock position suffers a $2500 drop in value. Even with the $900 in premiums to offset the loss, the options trader still suffers a $1600 loss.
Commissions
These examples exclude commissions and fees. Include all transaction costs when evaluating the profit or loss of a position.
Similar strategies
Expiration payoff and assumptions
For a nonnegative stock or index value S, with all options on the same underlying and expiration. K1, K2, … are strikes in ascending order. D is the signed net entry debit per underlying unit: stock cost plus option premiums paid, less stock-sale proceeds and option premiums received. A credit makes D negative.
P(S) = S − max(S − K1, 0) − max(S − K2, 0) − D
Multiply P(S) by the contract multiplier and number of matched strategy units, then subtract total fees. For stock legs, match the actual deliverable. These formulas exclude dividends, financing, borrow costs and early assignment; they do not calculate margin or a pre-expiration market value. “Limited” can still mean losing a substantial amount. The zero price floor used here must not be assumed for futures.
- Maximum profit
- max(0, K1 − D) per underlying unit, before fees
- Maximum loss
- Unlimited as S increases without bound
Exact breakeven conditions for these legs
S = (D − (0)) / 1 if 0 ≤ S ≤ K1; K1 ≤ S ≤ K2 is all breakeven if D = K1; S = (D − (K1 + K2)) / -1 if K2 ≤ S. Discard roots outside their stated interval; duplicate boundary roots count once.
To include fixed fees, increase D by total fees divided by the total number of matched underlying units. Zero profit can occur at a point, across a whole interval, or nowhere. A reported maximum profit of zero means no positive profit is possible; it does not promise that a zero-loss exit exists.
Financial mechanics reviewed:
Sources: OIC strategy reference; OIC assignment guidance. Formulas use the stated payoff assumptions; examples are illustrative, not market quotes. Editorial standards and corrections.