Ratio Put Spread
Description
The Ratio Put Spread is the opposite of a Put Ratio Backspread in that we are net short
options. This means we are exposed to uncapped risk and can only make a limited
reward. As such, this is an undesirable strategy, and you’d be better off trading one
of the long butterflies.
Increasing volatility is harmful to this strategy because of our exposure to
uncapped risk. The best thing that can happen is that the stock doesn’t move at all.
The Ratio Put Spread involves buying and selling different numbers of the same
expiration puts. Typically we sell and buy puts in a ratio of 2:1 or 3:2, so we are
always a net seller. This gives us the uncapped risk potential. It also reduces the net
cost of doing the deal such that we create a net credit.
P/L Profile
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