Ratio Writing

ratio writing

See variable ratio option writing.

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Ratio Writing

An options investment strategy in which the owner of an underlying security writes a number of calls at different strike prices on that security. Generally, only one of those options is exercised (if any are at all), leaving the owner with only the profit of the option premiums. Ratio writing thus has limited profit potential, but carries the possibility that an option will be exercised at a price favorable to the writer.

The "ratio" in the term comes from the fact that the writer may write a theoretically unlimited number of options per 100 shares of the underlying security actually owned. Often, the owner writes two options per 100 shares, resulting in a 2:1 ratio.