Put Ratio Backspread
The Put Ratio Backspread strategy involves selling and buying put options in a specific ratio.
The Put Ratio Backspread is an advanced options trading strategy designed for traders who anticipate a significant downward move in the price of an underlying asset. This strategy combines the sale and purchase of put options in a specific ratio, typically selling one put option and buying two (or more) put options with a lower strike price.
How It Works:
1. Sell a Put Option: The trader sells a put option at a specific strike price.
2. Buy Put Options: The trader buys more than one put option (commonly two) at a lower strike price. Both options share the same expiration date.
Potential Profit and Loss:
- Maximum Profit: Unlimited on the downside. The profit increases as the underlying asset's price declines.
- Maximum Loss: Limited to the difference between the premiums received and paid. This loss occurs if the underlying closes at the strike price of the purchased put options.
Benefits:
- Profit from Large Downward Move: The strategy can provide substantial profits if the underlying asset experiences a significant decrease.
- Break-even Point: Achieved when the underlying asset price equals the higher strike price minus the net cost of the spread.
Drawbacks:
- Risk of Small Downward Moves: If the underlying asset declines moderately, settling between the two strike prices, it can result in a maximum loss.
- Complexity: This strategy is more intricate than basic options plays and might be daunting for novices.
Example:
Suppose NIFTY is trading at ₹20000:
1. Sell 1 ₹20100 put option for a premium of ₹123.
2. Buy 2 ₹19900 put options at a premium of ₹34.25 each.
Net credit: ₹54.25 (Total premium received - Total premium paid)
Breakeven: ₹19573-₹20039
If NIFTY drops significantly below ₹19753, the profit potential is unlimited. If NIFTY remains above ₹20039 or declines slightly, the options expire worthless, resulting in limited profit. However, if NIFTY closes between ₹19753 and ₹20039 at expiration, the trader faces the maximum loss. (difference between the strikes minus/plus credit received/paid)
In summary, the Put Ratio Backspread is tailored for the bearish trader expecting a sharp downward move. While it offers unlimited profit potential on the downside with a defined maximum risk, understanding its risk-return dynamics is crucial.
Other Strategies
Iron Condor
A strategy designed to profit from low volatility in the underlying asset, combining a bullish put credit spread and a bearish call credit spread to it.
Iron Butterfly
This is a strategy which profits from low volatility in the price of the underlying asset while minimizing risk.
Short Strangle
A short strangle is a non directional trading strategy where an investor sells an (OTM) call option and put option on the same underlying asset simultaneously.
Short Straddle
A Short straddle is considered neutral or non-directional because it profits from minimal price movement in the underlying asset.
Put Ratio Backspread
The Put Ratio Backspread strategy involves selling and buying put options in a specific ratio.
Bear Call Spread
A Bear Call Spread is an options trading strategy that's used when a trader believes the price of an underlying asset will go down, but not significantly.
Bear Put Spread
A Bear Put Spread is a type of vertical spread strategy used in options trading.
Long Put
Long Put option is the most basic & simplest strategy. It is recommended or implemented when we expect the underlying asset to show significant downside move.
Short Call
Short Call strategy is employed in a bearish or neutral market outlook, where the underlying asset's price is expected to remain stable or fall.
Call Ratio Backspread
The Call Ratio Backspread strategy involves selling and buying call options in a specific ratio.
Bull Put Spread
A Bull Put Spread is a type of vertical spread strategy used in options trading
Bull Call Spread
A Bull Call Spread is an options trading strategy that's used when a trader believes the price of an underlying asset will go up, but not significantly.
Short Put
Short Put strategy is employed in a bullish or neutral market outlook, where the investor believes that the underlying asset's price will remain stable or rise.
Long Call
Long Call option' is the most basic & simplest strategy. It is recommended or implemented when we expect the underlying asset to show significant upside move.
