• Connect

Put Ratio Back Spread Option Strategy

Put Ratio Back spread Option Strategy

What is Put Ratio BackSpread Option Strategy?

  • Call Ratio backspread is an extremely Bearish strategy that expects high volatility in underlying, Put Ratio Backspread works well if we have bearish as well as bullish view but biased towards bearish. This is similar to Straddle except the payoff is flat on the upside. Traders can make profit too if the market rises, but make higher profit if the market falls or crashes sharply.

When to Execute?

  • Put Ratio Backspread can be devised when we are extremely bearish on the market as well as expecting high volatility. Put ratio Backspread also provides upside protection as we have defined loss or profit.

What is the Trade?

  • Under Put Ratio Backspread we’ll Sell One lot of At-the-money (ATM) Put and Buy 2 lots OTM (Out-of-Money) Put. Net cost to establish the strategy is very low.

What will be maximum profit?

  • Put Ratio Backspread maximum Profit is undefined if stock falls below the lower breakeven and limited if rallies above.

What will be maximum loss?

  • Maximum loss is the difference between the strike plus net outflow or less net inflow.

What are the advantages?

  • Reduced cost of formulating the strategy. In scenarios where implied volatility of call is rising, it provides limited risk. Generates higher return in scenarios where stock gives exponential return.

What are the disadvantages?

  • Loss could be higher if the stock doesn’t give desired move. Not meant for an intermediate trader. Time decay could be harmful to the strategy as we are net long. Strike selection becomes key to success.

Example for Put Ratio Backspread:

  • Nifty future price is 15800. A Put Ratio Backspread can be devised by sell one lot of 15800 Call At-the-Money (ATM) @95 and selling two of 15600 CE (OTM) @ 30. Net Premium Paid or Received = Rs. (+35). Maximum profit undefined below 15435. Maximum loss is at 15600.