Tim Olson
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1.7 KiB
1.7 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A strongly bearish volatility strategy selling fewer near-ATM puts at K1 and buying more OTM puts at K2 < K1, with unlimited profit on a sharp decline and limited loss in between. |
|
Put Ratio Backspread
Section: 2.37 | Asset Class: Options | Type: Volatility
Overview
The put ratio backspread consists of a short position in N_S close to ATM put options with strike K1, and a long position in N_L OTM put options with strike K2 (K2 < K1), where N_L > N_S. Typically N_L = 2, N_S = 1 or N_L = 3, N_S = 2. The trader's outlook is strongly bearish. This is a capital gain strategy.
Construction
- Sell N_S put options at strike K1 (near ATM)
- Buy N_L put options at strike K2 (OTM lower, K2 < K1, N_L > N_S), same expiry
Net debit or credit H
Payoff Profile
f_T = N_L × (K2 - S_T)+ - N_S × (K1 - S_T)+ - H
- Upper breakeven (if H < 0): S*_up = K1 + H/N_S
- Lower breakeven: S*_down = (N_L × K2 - N_S × K1 - H) / (N_L - N_S)
- Max profit: P_max = N_L × K2 - N_S × K1 - H (if stock goes to zero)
- Max loss: L_max = N_S × (K1 - K2) + H (in the zone near K2 where long puts are OTM but short puts are ITM)
Key Conditions / Signals
- Strongly bearish; expects a significant decline below K2
- Ideally entered as a credit (H < 0) so that profit is also made if stock stays above K1
- Loss zone is bounded between the two breakevens
Notes
The difference between put ratio backspread and ratio put spread: here N_L > N_S (more longs than shorts). The maximum loss occurs near K2 at expiry. If H < 0, the position profits if the stock stays well above K1 or collapses well below the lower breakeven.