Put Ratio Backspread

What Is Put Ratio Backspread?

A put ratio backspread is a options trading strategy that consolidates short puts and long puts to make a position whose profit and loss potential relies upon the ratio of these puts.

Figuring out Put Ratio Backspread

A put ratio backspread is purported in light of the fact that it looks to profit from the volatility of the underlying stock, and consolidates short and long puts in a certain ratio at the watchfulness of the options investor. It is built to have unlimited likely profit with limited loss, or limited expected profit with the prospect of unlimited loss, contingent upon the way things are structured. The ratio of long to short puts in a put ratio backspread is regularly 2:1, 3:2 or 3:1.

Put Ratio Backspread Example

A put ratio backspread joins short puts and long puts and looks to profit from the volatility of the underlying stock. For instance, a stock trading at $29.50 may have one-month puts trading as follows:

$30 puts trading at $1.16 and $29 puts trading at 62 pennies. A trader who is bearish on the underlying stock and wishes to structure a put ratio backspread that would profit from a decline in the stock, could buy two $29 put contracts for a total cost of $124 and sell short a $30 put contract to receive the $116 premium. (Recall that every option contract addresses 100 shares.) The net cost of this 2:1 put ratio backspread, without considering commissions, is, hence, $8.
If the stock declines to $28 at expiration, the trade breaks even (leaving to the side the marginal $8 cost of putting on the trade.) If the stock tumbles to $27 at option expiry, the gross gain is $100; at $26, the gross gain is $200, etc.
In the event that, then again, the stock appreciates to $30 by option expiry, the maximum loss is restricted to the cost of the trade or $8. The loss is restricted to $8 paying little heed to how high the stock trades by option expiry.

Highlights

A put ratio backspread is an options trading strategy that joins short puts and long puts to make a position whose profit and loss potential relies upon the ratio of these puts.
The ratio of long to short puts in a put ratio backspread is commonly 2:1, 3:2 or 3:1.
Put ratio spread is built to have unlimited expected profit with limited loss, or limited likely profit with the prospect of unlimited loss, contingent upon the way things are structured.