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Put Ratio Back Spread Strategy

Strategy Type:

Put Ratio Back Spread is a moderately bearish strategy. It is used when an investor expects the underlying asset's price to decrease but is willing to accept a limited risk if the price remains stable or increases slightly.

Components: The strategy involves two main components:

  • Long Put Options: Simultaneously, the investor buys two or more put options with a lower strike price. These are the "long puts."
  • Short Put Option: The investor sells (writes) one or more put options with a specific strike price. These are the "short puts."

Profit and Loss Potential:

  • Maximum Profit: The maximum profit is theoretically unlimited if the underlying asset's price falls significantly. Profit increases as the asset's price decreases.
  • Maximum Loss: The maximum loss is limited and occurs if the underlying asset's price remains stable or increases slightly. It is typically capped at the net premium received from selling the short puts.
Break-Even Point: There are typically multiple break-even points, depending on the specifics of the options used. Break-even points can be calculated based on the strike prices of the options.

Strategy Goals:

  • The primary goal of a Put Ratio Back Spread is to profit from a moderate price decrease in the underlying asset while limiting risk if the price remains stable or increases slightly.
  • The strategy can also provide income through the sale of the short puts.

Risk Management:

  • The risk is limited to the net premium received from selling the short puts.
  • The strategy offers a controlled risk-reward profile, with the potential for unlimited profit if the asset's price decreases significantly.