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Ratio Put Spread Option Strategy

Ratio Put Spread Option Strategy

What is Ratio Put Spread Option Strategy?

  • Ratio Put Spread Option Strategy is Neutral to moderately Bearish Strategy. In this we expect stock to remain above lower breakeven point. Ratio Put Spread is a blend of Bear Put Spread and a Naked put sell, where naked Put will be the same as lower strike of Bear Put Spread.

When to Execute?

  • Ratio Put Spread should be implemented when expect slow fall till to the sold strike price and expecting decline in volatility.

What is the Trade?

  • In Ratio Put Spread we generally buy one lot of At-the-money Call and sell two lots of Out-of-money Call option. The variation to Ratio Put spread is to use different ratios such as 1X3,2X3 or 3X5.

Breakeven for Ratio Spread

  • As Net Credit = Lower Strike Price + Difference in strike + Net Premium Received. As net Debit = there will be two breaks even. Upper Breakeven = Lower Strike Price – Difference in strike + Net Premium paid. Lower Breakeven = Higher Strike + Net premium Paid

What will be maximum profit?

  • Maximum profit would occur at lower strike price at expiry. Here the two short puts will expire worthless and long puts will turn In-the-money (ITM). It can be calculated as follows = Higher Strike – Lower Strike + net premium received.

What will be maximum loss?

  • Maximum loss is undefined below the lower breakeven because this is not a complete hedge strategy as we short on more put than buying.

What are the advantages?

  • Net credit received acts as a cushion for fast downside movement in stock. Profitable when stock remains range bound between two strikes as it has higher theta gain. What are the disadvantages? Uncapped risk if stock falls below lower BEP. Managing the trade if stock falls too fast too early. Comparatively complicated trade for intermediate traders.

Example for Ratio Put Spread:

  • Nifty future price is 15800. A Ratio Put Spread can be devised by adding one lot of 15500 PE At-the-Money (ATM) @265 and selling two of 15500 PE (OTM) @ 160 Net Premium Paid or Received = Rs. (+55) Maximum Loss undefined below 15145. Maximum profit is at 15500.