Ratio Write

A ratio write is an options strategy where someone who owns shares of a stock sells more call options against that stock than the number of share lots they actually hold. A call option is a contract that gives its buyer the right to buy 100 shares at a set price before a certain date; selling a call obligates the writer to deliver shares if the buyer exercises that right.

In a plain "covered call," an investor sells one call for every 100 shares owned, so the position is fully covered — if the call is exercised, the writer simply hands over stock they already have. A ratio write goes further: for example, owning 100 shares but selling two or three calls against them. The calls covered by the owned shares stay "covered," but the extra calls are "naked" — there is no stock backing them, so if the stock rallies hard and all the calls are exercised, the writer must buy additional shares on the open market, possibly at a much higher price, to fulfill the obligation.

The appeal of a ratio write is that selling more calls brings in more upfront premium (the price the option buyer pays), which increases income if the stock stays flat or drifts down modestly. The catch is that the uncovered portion carries open-ended risk on the upside, similar to selling a naked call outright, which is why brokers require higher margin (posted collateral) for this kind of position and typically only approve it for accounts with an appropriate options trading level.

The nuance that trips people up is thinking of a ratio write as just "a bigger covered call." It is not a fully hedged income strategy — beyond the shares owned, it behaves like a bet that the stock will not rise sharply, and losses on the uncovered calls can exceed the premium collected if the stock moves against the position.