Contents

PUT Ratio Spread

PUT Ratio Spread is a moderately bearish to neutral strategy. It involves Buying a PUT at a higher strike and Selling 2 PUTs at a lower Strike to establish a net credit position. You might want to establish the strategy when the volatility is falling.

The strategy possesses unlimited risk and it is better to use this strategy on Index options as they are less volatile. Also, this strategy is more profitable closer to the expiry.

Trade Set-Up

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Sell 2 lower Strike PUTs

Eg: Sell two 9800 PUTs

short put-Finvezto

Buy a higher strike PUT

Eg: Buy a 10000 PUT

Naked Put-Finvezto

Put Ratio Spread

Put Ratio Spread-Finvezto

Entry Checklist

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Market Outlook
  • Moderately Bearish to Neutral Outlook
  • Price should be above the immediate support zone identified
  • Volatility
  • Initiate the position when the implied volatility starts falling
  • Strike Price
  • The farther you go away from the current price or spot price, the lesser the premium you will receive.
  • Choose strikes preferably below the support zone identified.
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is unlimited when the price breaks below the support zone and falls heavily.
  • Reward [Profit]
  • Maximum profit is limited and occurs when price ends near the strike price of the lower strike PUTs.
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is helpful for this strategy as long as price stays above the strike price of the lower strike PUTs.
  • Volatility impact [Vega]
  • A reduction in Volatility is helpful for the position when price stays above the higher strike PUT.
  • Increase in Volatility is harmful when price is closer to the strike price of the lower strike PUTs
  • 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 price falls below the support zone identified, then this strategy might put you at a huge risk. Hence, using stop loss to exit is vital.