Ratio Call Spreads 104: Management & Adjustments

Downside Defense

If the spread was opened with a large debit and the stock declines, the short calls may be rolled down (similar to ratio writes).

If the strikes are close and the debit is small, downside action is often unnecessary.

Reduce the Ratio (Upside Defense)

Upside defense is usually done by buying additional long calls to reduce the ratio.

Eventually, the goal is a 1:1 bull spread, which removes unlimited upside risk.

Stepwise Reduction Example

Suppose you are long 5 calls and short 10 calls (10:5).

Instead of buying all 5 additional longs at once, you can buy 2 at a lower price, then buy the remaining 3 later if needed.

If the first 2 are bought at 8 points, the remaining 3 can be bought at about 13 points and still break even.

Break-even Cost for Added Longs

Formula to convert into a 1:1 bull spread at break-even:

Break-even cost per added long = (Short calls x strike spacing - total debit to date) / number of naked calls.

In the 2:1 example: (2 x 5 - (-1)) / 1 = 11 points.

Delta/ESP Adjustments

Advanced traders can re-neutralize by delta or ESP (equivalent stock position).

If deltas shift, buy long calls or buy back short calls to restore neutrality.

Avoid over-adjusting because commissions can overwhelm edge.

Delta Example

If deltas shift from 0.80/0.50 to 0.90/0.65, the neutral ratio changes from 1.6:1 to about 1.38:1.

A 16:10 spread could be adjusted toward 16:12 (1.33:1) by buying two additional long calls.

This keeps the position closer to delta-neutral without immediately closing the spread.

Take Profits

If time has passed and the stock is near the short strike, consider closing to realize the profit peak.

If the stock is between strikes near expiration, the long call may keep value while short calls decay. Lock profits if a reversal would wipe them out.