From the September 01, 2011 issue of Futures Magazine • Subscribe!

Using a 1x2 options ratio spread

Options Strategy

Let’s say that XYZ stock is trading at $50. You buy 100 shares of stock, buy one 50 call for $4 and sell two 55 calls for $2 each. "Breathing room" shows what your risk/reward in this 1x2 ratio spread looks like at expiration.

Even though the option spread incorporates what appears to be a naked position, there are no uncovered options in the 1x2 when added with the underlying position. The first 55 short call is covered by the stock. The second 55 short call is covered by the long 50 call. You essentially are left with a covered call position combined with a bull call spread. The premium collected on the two 55 calls pays for the premium of the one 50 call.

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