In combination positions (e.g. bull spreads, butterflys, ratio spreads), one can use calls or puts to achieve similar, if not identical, profit profiles. Like its call counterpart, the put ratio backspread combines options to create a spread which has limited loss potential and a mixed profit potential.
It is created by combining long and short puts in a ratio of 2:1 or 3:1. In a 3:1 spread, you would buy three puts at a low exercise price and write one put at a high exercise price. While you may, of course, extend this position out to six long and two short or nine long and three short, it is important that you respect the (in this case) 3:1 ratio in order to maintain the put ratio backspread profit/loss profile.
When you put on a put ratio backspread: are neutral but want the market to move in either direction.
Your market expectations here would be for a volatile market with a greater probability that the market will fall than rally.
How would the profit/loss profile of a put ratio backspread differ from a call ratio backspread?
Unlimited profit would be realized on the downside.
The two long puts offset the short put and result in practically unlimited profit on the bearish side of the market. The cost of the long puts is offset by the premium received for the (more expensive) short put, resulting in a net premium received.
To put on a put ratio backspread, you: buy two or more of the lower strike and sell one of the higher strike.
You sell the more expensive put and buy two or more of the cheaper put. One usually receives an initial net premium for putting on this spread. The Maximum loss is equal to: High strike price - Low strike price - Initial net premium received.
For eg if the ratio backspread is 45 days before expiration. Considering only the bearish side of the market, an increase in volatility increases profit/loss and the passage of time decreases profit/loss.
The low breakeven point indicated on the graph is equal to the lower of the two exercise prices... minus the call premiums paid, minus the net premiums received. The higher of this position's two breakeven points is simply the high exercise price minus the net premium.
It is created by combining long and short puts in a ratio of 2:1 or 3:1. In a 3:1 spread, you would buy three puts at a low exercise price and write one put at a high exercise price. While you may, of course, extend this position out to six long and two short or nine long and three short, it is important that you respect the (in this case) 3:1 ratio in order to maintain the put ratio backspread profit/loss profile.
When you put on a put ratio backspread: are neutral but want the market to move in either direction.
Your market expectations here would be for a volatile market with a greater probability that the market will fall than rally.
How would the profit/loss profile of a put ratio backspread differ from a call ratio backspread?
Unlimited profit would be realized on the downside.
The two long puts offset the short put and result in practically unlimited profit on the bearish side of the market. The cost of the long puts is offset by the premium received for the (more expensive) short put, resulting in a net premium received.
To put on a put ratio backspread, you: buy two or more of the lower strike and sell one of the higher strike.
You sell the more expensive put and buy two or more of the cheaper put. One usually receives an initial net premium for putting on this spread. The Maximum loss is equal to: High strike price - Low strike price - Initial net premium received.
For eg if the ratio backspread is 45 days before expiration. Considering only the bearish side of the market, an increase in volatility increases profit/loss and the passage of time decreases profit/loss.
The low breakeven point indicated on the graph is equal to the lower of the two exercise prices... minus the call premiums paid, minus the net premiums received. The higher of this position's two breakeven points is simply the high exercise price minus the net premium.
No comments:
Post a Comment