Loading ... ... Please wait!      Loading
Visually Analyze Option Strategies
 Home    Tutorials   Features   APPL 1.0   Webservices   Component-Lib    Login    Subscription   User Guide 



Ratio Put Spread

 

Description

 

The Ratio Put Spread is the opposite of a Put Ratio Backspread in that we are net short options. This means we are exposed to uncapped risk and can only make a limited reward. As such, this is an undesirable strategy, and you’d be better off trading one of the long butterflies.

 

The Ratio Put Spread involves buying and selling different numbers of the same expiration puts. Typically we sell and buy puts in a ratio of 2:1 or 3:2, so we are always a net seller. This gives us the uncapped risk potential. It also reduces the net cost of doing the deal such that we create a net credit.

 

Market Opinion

 

Neutral to bullish.

         

P/L Profile

 

Description: Description: Description: C:\avasaramworkspace\avasaramWeb\web\tutorials\options\Ratio Put Spread_files\image001.jpg 

 

 

 

 

 

 

 

 

 

 

 

 

 

When To Use

 

This is an income strategy. You are looking for a net credit if the stock stays within a range or rises.

 

Example

 

XXXX is trading at $27.65 on May 10, 2011.

Sell two June 2011 25 strike puts at $0.42.

Buy one June 2011 $27.50 strike put at $1.33.

 

Benefit

 

This position will be profitable if the stock stays within a range.

 

Risk vs. Reward

 

There is unlimited risk in this position, with capped reward.

 

Net Upside

 

The difference between the strike prices plus the net credit.

 

Net Downside

 

Unlimited downside.

 

Break Even Point

 

Break even up: Higher strike price minus net debit times the number of long contracts.

 

Break even down: Higher strike price minus the difference in strike prices, times the number of short contracts, divided by the number of short contracts less long contracts, minus the net credit received (or plus net debit paid).

 

Effect Of Volatility

 

Increasing volatility is harmful to this strategy because of our exposure to

uncapped risk. The best thing that can happen is that the stock doesn’t move at all.

 

Effect Of Time Decay

 

Positive. You are selling more contracts than buying, and want to be exposed only one month or less.

 

Alternatives Before Expiration

 

To stem a loss, if the stock drops under the stop loss, close out the position. You can also buy back the short puts. This kind of trade is best closed out one month before expiration to stem losses and capture profit.

 

Alternatives After Expiration

 

Close out the position by selling the puts bought, and by buying back the puts sold.

 

 

 

 
Copyright ©2012, Avasaram LLC. All rights reserved. Version 10.1.1 Follow us on   Contact
Disclaimer
The information contained in this website is provided to you "as is," for your informational purposes only, without any representation or warranty of accuracy or completeness of information or other warranty of any kind. In no event will avasaram.com be liable to any party for any direct, indirect, incidental, special or consequential damages for use of this website or reliance upon any information or material accessed via it or any other hyperlinked website including, but not limited to, damages arising from loss of profits, business interruption, or loss of data.