Australian investors in 2025 are navigating a landscape marked by persistent inflation, unpredictable rate moves, and shifting market volatility. For those comfortable with options trading, the variable ratio write has emerged as a sophisticated strategy to balance risk and reward in this environment. But how does it work, and why is it gaining attention this year?
What Is a Variable Ratio Write?
A variable ratio write is an options strategy where an investor holds a long position in an underlying asset (such as shares of an ASX-listed company) and simultaneously writes (sells) more call options than they own shares, but not always in a fixed ratio. The key is that the number of calls written can change based on market outlook, risk tolerance, and volatility expectations.
- Example: Suppose you own 1,000 shares of BHP and write 12 call option contracts (each contract representing 100 shares). Here, you’re ‘overwriting’ by 200 shares, creating a variable ratio.
- This approach differs from the traditional covered call (where you write exactly one call for every 100 shares owned).
The variable ratio write generates additional premium income but comes with increased risk if the share price surges past the strike price of the extra calls.
Why 2025? Market Dynamics Fueling Interest
Several 2025-specific factors are driving Australian investors to explore advanced options strategies like the variable ratio write:
- Persistently Elevated Volatility: Ongoing uncertainty around RBA rate moves and global economic growth have kept implied volatility higher than the five-year average. Higher volatility means richer call premiums.
- Taxation Updates: The ATO’s 2025 guidance has clarified the treatment of options premiums, especially for active traders and SMSFs, providing more certainty for those using ratio strategies for income.
- Increased Retail Access: Several Australian brokers now offer improved options trading platforms, with lower fees and better analytics, making strategies like variable ratio writes more accessible to sophisticated retail investors.
With dividend yields under pressure and investors seeking new sources of income, the variable ratio write has become a tool of choice for those looking to squeeze extra returns from their portfolios.
Risks and Rewards: Is It Right for You?
Like any advanced options strategy, the variable ratio write is not for the faint of heart. Here’s how the risk/reward profile stacks up:
- Upside: Enhanced premium income, especially in a range-bound or moderately bullish market, and flexibility to adjust exposure based on market view.
- Downside: If the underlying rallies sharply, the uncovered portion of the short calls (the “naked” part) can generate significant losses, as you may be forced to sell shares you don’t own at the strike price, potentially at a loss.
- Neutral/Bearish Scenarios: If the underlying trades sideways or drifts lower, the extra premium from overwritten calls cushions losses, but gains are capped.
Real-World Example: In early 2025, an investor using a variable ratio write on CSL Limited benefited from high call premiums as the stock oscillated within a tight band. However, when CSL unexpectedly surged following a positive clinical trial announcement, the same strategy led to losses on the uncovered calls. This underlines the importance of vigilant risk management.
Implementation Tips for 2025
- Use the variable ratio write only on highly liquid, blue-chip stocks where options markets are deep (think BHP, CSL, CBA).
- Monitor market volatility closely; consider reducing the overwrite ratio if implied volatility spikes.
- Set clear stop-loss and position management rules, especially for the naked portion of the trade.
- Review your strategy after major RBA policy updates or significant company news events.
The variable ratio write can supercharge income in the right market, but it demands a disciplined, hands-on approach—especially in today’s unpredictable climate.
