Ratio Put Spread


Slightly bearish, you want the stock to go down to Leg 2 and then stop.

Alias

Front Spreads with Puts, Ratio Vertical Spread

Involves selling a greater number of put options on a particular security than the number of put options that are purchased. This strategy is used when the trader expects the underlying security to experience a limited price movement and wants to profit from the difference in the premiums received for the short-put options and the premiums paid for the long-put options. The trader profits if the price of the underlying security stays within a certain range.

This strategy allows you to purchase a put that is at-the-money or slightly out-of-the-money without paying full price. The goal is to obtain the put with Leg 2 for a credit or a very small debit by selling the two puts with Leg 1.

The stock drops too low, the risk is infinite and the strategy is neutral to slightly bearish. Although you don’t want to remain exposed for too long, time is beneficial to this strategy. Ensure to have a stop-loss plan in place.

Breakeven

Leg 2 minus net debit paid to enter the option
Leg 1 minus the maximum profit potential

Sweet Spot

stock price to be exactly at Leg 1 at expiration

Max Profit

Limited to the difference between Leg 1 and Leg 2 minus the net debit paid.

Max Loss

Limited Risk to the debit paid for the spread if the stock price goes up
High Risk if the stock price goes way up.

 

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