Variable Ratio Write
Candlefocus EditorEssentially, a variable ratio write strategy allows investors to benefit from a static stock price. By buying multiple call options at varying strike prices, investors acquire a range of options that are in the money if the stock remains static. This means that the premiums the trader pays for these call options will actually not be a complete loss should the stock remain static.
For instance, if an investor has a range of call options that expire between one month and nine months with strike prices between $40 and $50, and the current stock price is $45, then the investor stands to make a profit if the stock remains static.
However, this strategy isn’t without its risks. It’s important to remember that no matter how desirable it may seem, stock prices don’t stay static forever. Therefore, if the stock price unexpectedly rises or falls significantly, the investor would most likely incur a loss.
Apart from that, managing a variable ratio write strategy can be time-consuming since the investor needs to make sure that the call options are correctly priced, remain in the money, and that the premiums being paid are sufficient to make a profit.
To summarize, a variable ratio write is a strategy used by traders to generate additional income from their existing stock investments. The trader buys multiple call options at varying strike prices, giving them a range of options that are in the money, if the stock remains static. As long as the investor is vigilant in monitoring the stock prices, this strategy can be highly rewarding and provide them with a nice side income. However, it is important to remember that there are also risks involved.