Contents

PUT Ratio BackSpread

PUT Ratio BackSpread is a bearish strategy used if you are expecting a highly volatile movement in the stock or index. It involves Selling a PUT at a higher strike and Buying 2 PUTs at a lower Strike. The ratio of the bought PUTs to the sold PUT should be 2 : 1. You can use other ratios as well based on your risk.

You can visualize this strategy as a Bull Put Spread plus an OTM Long PUT. This strategy works even when you get the prediction completely wrong if you set it up as a net credit position. That is, if the premium received by Selling the higher strike PUT is more than the premium paid to buy the lower strike PUTs, then it is a net credit position. Even if the price moves up significantly against your prediction, you will profit. If price tanks or falls significantly, your profits are theoretically unlimited.

The strategy is typically used by investors who own a stock. Instead of buying a PUT to protect the stock, they can lower the cost by setting up a PUT ratio BackSpread. If you are trading this strategy in the short term, then you can use it before company results are announced and if your view is bearish.

Trade Set-Up

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Sell higher strike ATM PUT

short put-Finvezto

Buy 2 lower strike OTM PUTs

Naked Put-Finvezto

PUT Ratio Backspread

Put Ratio Backspread-Finvezto

Entry Checklist

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Market Outlook
  • Bearish Outlook on a highly volatile stock or index
  • Use on stocks which are going to announce results soon
  • Volatility
  • Initiate the position when the implied volatility or India VIX is low and on the rise
  • Positional or Intraday?
  • Hold overnight positions only in next month or far month options as you will give more time for the stock to move. The decay overnight will also be less
  • When you are trading weekly options, hold only when you are sure if the price is going to make a big move downwards. Otherwise, you will become a victim of time decay if the stock doesn't move and stays in a range.
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is when the stock price ends at the OTM strike where you bought the 2 PUTs
  • Reward [Profit]
  • Maximum profit is unlimited if the stock price keeps falling
  • Break Even Point
  • There are 2 break even points. One on the upside and the other on the downside.
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is harmful if the price falls or closer to the lower strike PUT
  • Time decay is helpful if the price shoots up or closer to the higher strike PUT
  • Volatility impact [Vega]
  • Increase in Volatility is helpful to the position around the lower strike PUTs
  • Increase in Volatility is harmful above the higher strike PUT.
  • Trade Management & Exit

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    Stop Loss & Exit
  • Stop Loss should be set in such a way that Risk is limited to 1-2% of your entire capital
  • If the stock stays between a support and an resistance, then you might be facing a loss. Move out of the position when the loss is about 1-2% of your capital