Put Ratio Back Spread option strategy - How and When to Implement
The Put Ratio back spread is an option strategy, executed the best when your outlook towards the stock or index is bearish. The strategy requires to sell 1 ITM PE and buy 2 OTM PE, and this is to be executed in the same ratio i.e for every 1 option sold, 2 options have to be purchased. This gives you limited money when the scrip goes up, but the profit is unlimited when the price of the stock goes down. It is executed for Net Credit.
Construction
Sell 1 Lot ITM Put
Buy 2 Lots OTM put
Example
Taking an example of Nifty which is trading at 8083. To implement the Put Ratio Back Spread, one can sell 1 lot of 8100 strike Put with premium Rs. 216 and can buy 2 lots of 7700 strike put with premium 89 each. There will be a net Credit of 38.
Particular
|
Value
|
Underlying
|
Nifty
|
Spot Price
|
8083
|
ITM Put, Sell
|
8100
|
OTM Put, Buy
|
7700
|
Credit (ITM)
|
216
|
Debit (2 OTM)
|
89
|
Net Credit
|
38
|
There will a spread of 400 points. We will have two break-even points in the strategy. The Upper break-even will be around 8062 and the lower break-even will be at 7338. See the table given below. This gives an unlimited profit when it goes significantly down. The maximum loss occurs when Nifty expires at 7700.
Details
| ||
Spread
|
400
| |
Lower Breakeven
|
7338
| |
Upper Breakeven
|
8062
| |
Max Loss
|
362
| |
Max Loss level
|
7700
| |
Max Profit
|
Unlimited
|
Pay Offs of the strategy
Calculation for The strategy
Market Expiry
|
ITM_IV
|
PR
|
ITM Payoff
|
OTM_IV
|
PP
|
OTM_Payoff
|
Strategy Payoff
|
7000
|
1100
|
216
|
-884
|
1400
|
178
|
1222
|
338
|
7100
|
1000
|
216
|
-784
|
1200
|
178
|
1022
|
238
|
7200
|
900
|
216
|
-684
|
1000
|
178
|
822
|
138
|
7300
|
800
|
216
|
-584
|
800
|
178
|
622
|
38
|
7400
|
700
|
216
|
-484
|
600
|
178
|
422
|
-62
|
7500
|
600
|
216
|
-384
|
400
|
178
|
222
|
-162
|
7600
|
500
|
216
|
-284
|
200
|
178
|
22
|
-262
|
7700
|
400
|
216
|
-184
|
0
|
178
|
-178
|
-362
|
7800
|
300
|
216
|
-84
|
0
|
178
|
-178
|
-262
|
7900
|
200
|
216
|
16
|
0
|
178
|
-178
|
-162
|
8000
|
100
|
216
|
116
|
0
|
178
|
-178
|
-62
|
8100
|
0
|
216
|
216
|
0
|
178
|
-178
|
38
|
8200
|
0
|
216
|
216
|
0
|
178
|
-178
|
38
|
8300
|
0
|
216
|
216
|
0
|
178
|
-178
|
38
|
8400
|
0
|
216
|
216
|
0
|
178
|
-178
|
38
|
8500
|
0
|
216
|
216
|
0
|
178
|
-178
|
38
|
If you see the table carefully, you will find that, if Nifty expires anywhere above 8100, there will be a constant profit of Rs. 38. If Nifty expires at 7300 or below that we are getting profit Rs. 38 to unlimited. The maximum loss occurs at 7700 level - The level of which puts have been bought. If Nifty expires anywhere in the range of 8000 to 7400, will give you a loss.
You can also see the Maximum Loss is constant which is at Rs. 362. How does it come?
2 OTM PUT = 2*89 = 178
If Nifty expires 7700, we will have 0 premium for this two OTMs. For the ITM put we will have intrinsic value,
= 8100 - 7700 = Rs. 400.
At 400 we have to buy this position to close the strategy. So in this case loss,
= 400 - 216 (received at selling) = 184.
Thus,
Total Loss = 178 + 184 = Rs. 362.
Volatility Rank and Volatility Percentile
How to read Option data for trading
Disclaimer: The post has been prepared for informational and educational purposes only. It is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
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