Options Strategies
Ratio Put Back Spread
Strategies Ratio Put Back Spread
Component Sell 1 put with higher strike price/level and buy 2 put with lower strike price/level
1. Result in net premium received
2. Result in net premium paid
When there is net premium received:
Potential Profit
  • When the stock price/index level is below the lower break-even point, substantial, equals to lower break-even point minus stock price/level
  • When the stock price/index level is above the upper break-even point, limited to net premium received
Maximum Loss
  • When the stock price/index level is between the lower and upper break-even point
  • Limited to the strike price/level difference minus net premium received when the stock price/index level is equal to the lower strike price/level
Time Value Impact Negative
Break-even
  • The lower break-even point equals to lower strike price/level minus the strike price/level difference plus net premium received
  • The upper break-even point equals to higher strike price/level minus net premium received
Remarks Compared with long straddle, a Ratio Put Back Spread (with net premium received) has substantial profit on the downside but limited profit on the upside.
Example
  Net Position -1 Aug 200 Put +2 Aug 180 Put

Component Sell 1 ABC Aug $200 Put, receive $35 and buy 2 ABC Aug $180 Put each at $16, totally pay $32
Net Premium Receive $35-$32=$3
Break-even
  • Lower: $180-($200-$180)+$3=$163
  • Upper: $200-$3= $197
Profit when Stock price is below $163 or above $197
Potential Profit
  • When the stock price is below $163, $163 - stock price
  • When the stock price is above $197, limited to $3
Potential Loss ($200-$180)-$3=$17
Time Value Impact Negative

Back