Ratio backspread and covered-call assignment construction

Matching the legs

A ratio backspread is built as a directional, roughly delta-neutral option spread that sells fewer options than it buys. It is usually entered for about a zero debit or credit. Margin is still required.

The usual construction buys more options than it sells so the sold contracts are meant to pay for the long side. That is most often done in 1x2 or 2x3 ratios, after implied volatility has been low. That implied-volatility setup is the usual backdrop for buying more options than are sold.

The illustrated 1x2 call backspread

The illustrated 1x2 call backspread shorts the 30 strike and buys the 33 strike. Risk stays modest until late in the life of the trade. That vacation-trade profile is why the structure can be left alone if the large move is delayed.

Margin on that backspread is set by the distance between the strikes, reduced by a credit or increased by a debit, because at least one short option sits closer to the money than the longs.

Assignment on a same-strike calendar

A calendar spread that buys an at-the-money longer-dated 15 call and sells a short-term 15 call needs no extra margin to sell the near-term call.

If the short 15 call is assigned with the stock at 16, the account is short stock at 15 and loses 1 on that stock. The long 15 call remains. It can be used to cover the short or left in place as a synthetic put.

After assignment, the short stock can be bought back and another short-term call sold against the long-dated call. Repeating that while the stock stays near the strikes can eventually leave the long option unencumbered, provided account funds can meet the short-stock margin.

When a covered call is taken away

Covered-call writing owns the underlying shares and sells a call against them, so the stock can be taken away if the short call is assigned. A covered call is taken away when the stock finishes above the sold strike at expiration, on any exchange. Within 25 cents of the strike the outcome can go either way because exercise costs may outweigh the benefit.

That assignment window is the last stretch before expiration, especially inside about a month and close to the strike. Short calls with about 30 days or less to expiration are generally assigned sooner than comparable longer-dated short calls.