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Put Ratio Spread

Strategy Type:

Put Ratio Spread is a neutral to bearish strategy. It's employed when an investor expects the underlying asset's price to remain stable or decline slightly.

Components: The strategy involves two main components:

  • Short Put Option: The investor sells (writes) one out-of-the-money put option with a specific strike price.
  • Long Put Option: Simultaneously, the investor buys two or more put options with a lower strike price. The number of long put options bought is typically greater than the number of short put options sold.

Profit and Loss Potential:

  • Maximum Profit:The maximum profit is limited. It occurs if the underlying asset's price declines moderately but remains above the strike price of the short put option. The profit is capped at the net credit received from selling the short put and buying the long puts.
  • Maximum Loss:The maximum loss is limited and occurs if the underlying asset's price drops sharply below the strike prices of the long put options. The loss is limited to the net debit (premium paid) when buying the long puts.
Break-Even Point: There are typically multiple break-even points based on the specifics of the options used. These points can be calculated based on the strike prices of the options.

Strategy Goals:

  • The primary goal of a Put Ratio Spread is to generate a net credit by selling the short put option, while the purchase of multiple long put options provides some downside protection.
  • The strategy is suitable when an investor has a mildly bearish outlook and wants to profit from a modest price decline or a stable price.

Risk Management:

  • The risk is limited to the net debit (premium paid) when buying the long put options. This defines the maximum loss.
  • The strategy provides controlled risk with a limited profit potential.