Tim Olson
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1.6 KiB
1.6 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A neutral-to-bullish income strategy selling more near-ATM puts at K1 than ITM puts bought at K2 > K1, collecting premium with unlimited downside risk below the lower breakeven. |
|
Ratio Put Spread
Section: 2.39 | Asset Class: Options | Type: Income
Overview
The ratio put spread consists of a short position in N_S close to ATM put options with strike K1, and a long position in N_L ITM put options with strike K2 (K2 > K1), where N_L < N_S. Typically N_L = 1, N_S = 2 or N_L = 2, N_S = 3. This is an income strategy if structured as a net credit trade. The trader's outlook is neutral to bullish.
Construction
- Sell N_S put options at strike K1 (near ATM)
- Buy N_L put options at strike K2 (ITM, 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 = K2 - H/N_L
- Lower breakeven: S*_down = (N_S × K1 - N_L × K2 + H) / (N_S - N_L)
- Max profit: P_max = N_L × (K2 - K1) - H (in zone [K1, K2])
- Max loss: L_max = N_S × K1 - N_L × K2 + H (if stock goes to zero; unlimited downside)
Key Conditions / Signals
- Neutral to mildly bullish; expects stock to remain above K1
- Structured as a net credit when possible (income strategy)
- High implied volatility makes the collected premium from extra short puts larger
Notes
Unlike the put ratio backspread (where N_L > N_S), here N_L < N_S, so there is net short put exposure below K1 creating unlimited downside risk. The maximum profit is achieved if the stock stays in the [K1, K2] zone at expiry.