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Direction |
Bearish |
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Strategy Type |
Capital Gain |
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Legs |
Buy 2 low strike puts |
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Sell 1 higher strike put |
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Max Reward |
Capped, |
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Max Risk |
Capped to the difference between the strikes - the net credit or the net debit paid. |
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Time Horizon |
Time decay is generally harmful to the position so its best to place the position over a longer period of time to reduce this. .
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Risk Profile |
Speculative |
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Payoff Diagram
Description
The Put ratio back spread is the opposite of the call ratio back-spread. It requires a sharp move in the share price to profit. Volatility increases help the position as we would be net long in bought puts.
Steps Involved
Buy on low volatility when sharp move in either direction is expected preferably down.
Buy two low strike puts and sell one higher.
Rational
A sharp decline in share price is expected, however if the share price rallies, a very limited loss or credit is made.