Put Ratio Backspread
Description
The Put Ratio Backspread is almost the precise opposite of the Call Ratio Backspread.
It enables us to make accelerated profits, provided that the stock moves sharply
downwards. Increasing volatility is very helpful because we’re net long in puts. The
worst thing that can happen is that the stock doesn’t move at all, and even a sharp
move up can be profitable, or at the very least, preferable to no movement at all.
The Put Ratio Backspread involves buying and selling different numbers of the
same expiration puts. Typically we buy and sell puts in a ratio of 2:1 or 3:2, so we are
always a net buyer. This gives us the uncapped profit potential. It also reduces the
net cost of doing the deal such that we can even create a net credit! Furthermore, our
risk is capped, though we need to investigate the strategy further in order to under-
stand it better.
P/L Profile
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