A call ratio back spreads inverse. This is a very negative approach that results in huge profits when the stock makes a significant downward move and losses when it moves just a little. You may still make a tiny profit if you were set up for a net credit and the stock rose.
Description
Involves selling a number of put options at a higher strike price and simultaneously buying a greater number of put options at a lower strike price, with both sets of options having the same expiration date. The trader will typically sell more put options at the higher strike price than they buy at the lower strike price, creating a “backspread” with a positive delta.
The goal of a ratio put backspread is to profit from a significant decrease in the price of the underlying asset. If the price of the underlying asset decreases enough, the long put options at the lower strike price will increase in value faster than the short put options at the higher strike price, resulting in a profit for the trader. However, if the price of the underlying asset does not decrease enough or increases, the trader will incur a loss.
Breakeven
Higher strike price of the short put options minus the premium received for those options, minus the lower strike price of the long put options and the premium paid for those options
Sweetspot
stock price goes way low
Max Profit
Limited to the difference between the strike prices of the options, minus any premiums received for the short put options
Maxl loss
is limited to the difference between the strike prices of the options, minus any premiums received for the short put options and any commissions or fees associated with the trade.
