![Put Ratio Backspread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F35a902f089de4d28cb2b39c119f55cd041901f66-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Put Ratio Backspread
The Put Ratio Backspread strategy involves selling and buying put options in a specific ratio.
The Put Ratio Backspread is an advanced options trading strategy designed for traders who anticipate a significant downward move in the price of an underlying asset. This strategy combines the sale and purchase of put options in a specific ratio, typically selling one put option and buying two (or more) put options with a lower strike price.
![73c5af02c364](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F6de260dbbc5fa310992659e4d89f21299afb8216-1216x713.png%3Fauto%3Dformat&w=3840&q=75)
How It Works:
1. Sell a Put Option: The trader sells a put option at a specific strike price.
2. Buy Put Options: The trader buys more than one put option (commonly two) at a lower strike price. Both options share the same expiration date.
Potential Profit and Loss:
- Maximum Profit: Unlimited on the downside. The profit increases as the underlying asset's price declines.
- Maximum Loss: Limited to the difference between the premiums received and paid. This loss occurs if the underlying closes at the strike price of the purchased put options.
Benefits:
- Profit from Large Downward Move: The strategy can provide substantial profits if the underlying asset experiences a significant decrease.
- Break-even Point: Achieved when the underlying asset price equals the higher strike price minus the net cost of the spread.
Drawbacks:
- Risk of Small Downward Moves: If the underlying asset declines moderately, settling between the two strike prices, it can result in a maximum loss.
- Complexity: This strategy is more intricate than basic options plays and might be daunting for novices.
Example:
Suppose NIFTY is trading at ₹20000:
1. Sell 1 ₹20100 put option for a premium of ₹123.
2. Buy 2 ₹19900 put options at a premium of ₹34.25 each.
Net credit: ₹54.25 (Total premium received - Total premium paid)
Breakeven: ₹19573-₹20039
If NIFTY drops significantly below ₹19753, the profit potential is unlimited. If NIFTY remains above ₹20039 or declines slightly, the options expire worthless, resulting in limited profit. However, if NIFTY closes between ₹19753 and ₹20039 at expiration, the trader faces the maximum loss. (difference between the strikes minus/plus credit received/paid)
In summary, the Put Ratio Backspread is tailored for the bearish trader expecting a sharp downward move. While it offers unlimited profit potential on the downside with a defined maximum risk, understanding its risk-return dynamics is crucial.
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![Put Ratio Backspread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F35a902f089de4d28cb2b39c119f55cd041901f66-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
Put Ratio Backspread
The Put Ratio Backspread strategy involves selling and buying put options in a specific ratio.
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![Call Ratio Backspread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2Feeadc316edb11d3524e82145279f0fb466ef39fd-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
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![Bull Put Spread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F9743b7b35c7710fd4431bcc9dcf0dce422a50240-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
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![Bull Call Spread](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F38bf8dd75f037f531c7372db168ab3196940bb58-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
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![Short Put](/_next/image?url=https%3A%2F%2Fcdn.sanity.io%2Fimages%2F46f2xaz7%2Fproduction%2F0bec9cbb2091c514f837bfa744f628fd00931ff7-2260x1415.png%3Fauto%3Dformat&w=3840&q=75)
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Long Call
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