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Put Ratio Backspread

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Dictionary Says

Definition of 'Put Ratio Backspread'

An option trading strategy that combines short puts and long puts to create a position whose profit and loss potential depends on the ratio of these puts. A put ratio backspread is so called because it seeks to profit from the volatility of the underlying stock, and combines short and long puts in a certain ratio at the discretion of the option investor. It is constructed to have unlimited potential profit with limited loss, or limited potential profit with the prospect of unlimited loss, depending on how it is structured. The ratio of long to short puts is typically 2:1, 3:2 or 3:1.
Investopedia Says

Investopedia explains 'Put Ratio Backspread'

For example, a stock trading at $29.50 may have one-month puts trading as follows: $30 puts trading at $1.16 and $29 puts trading at 62 cents. A trader who is bearish on the underlying stock and wishes to structure a put ratio backspread that would profit from a decline in the stock, could buy two $29 put contracts for a total cost of $124 and sell short a $30 put contract to receive the $116 premium. (Remember that each option contract represents 100 shares). The net cost of this 2:1 put ratio backspread, without taking commissions into account, is therefore $8.

If the stock declines to $28 at expiration, the trade breaks even (leaving aside the marginal $8 cost of putting on the trade). If the stock falls to $27 at option expiry, the gross gain is $100; at $26, the gross gain is $200 and so on.

If, on the other hand, the stock appreciates to $30 by option expiry, the maximum loss is restricted to the cost of the trade or $8. The loss is restricted to $8 regardless of how high the stock trades by option expiry.

Directory (Option Strategy)

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    Alligator Spread

  2. Atlantic Spread

  3. Back Fee

  4. Backspread

  5. Bailard, Biehl And Kaiser Five-Way Model

  6. Bear Call Spread

  7. Bear Put Spread

  8. Bear Spread

  9. Bear Straddle

  10. Box Spread

  11. Bull Call Spread

  12. Bull Put Spread

  13. Bull Spread

  14. Bullet Trade

  15. Butterfly Spread

  16. Buy A Spread

  17. Calendar Spread

  18. Call Ratio Backspread

  19. Collar

  20. Collar Agreement

  21. Condor Spread

  22. Contingent Order

  23. Conversion Arbitrage

  24. Covered Call

  25. Covered Combination

  26. Covered Straddle

  27. Credit Spread

  28. Death Put

  29. Debit Spread

  30. Delta Hedging

  31. Delta Neutral

  32. Delta Spread

  33. Diagonal Spread

  34. Dividend Arbitrage

  35. Double One-Touch Option

  36. Fence (Options)

  37. Fiduciary Call

  38. Fixed Dollar Value Collar

  39. FMAN

  40. Forex Hedge

  41. Forex Option & Currency Trading Options

  42. Form 6781: Gains And Losses From Section ...

  43. Front Fee

  44. Gut Spread

  45. Heston Model

  46. Horizontal Spread

  47. Implied Volatility - IV

  48. Interest Rate Collar

  49. Iron Butterfly

  50. Iron Condor

  51. Leg

  52. Leg Out

  53. Long Jelly Roll

  54. Long Leg

  55. Long Put

  56. Long Straddle

  57. Long-Term Equity Anticipation Securities ...

  58. Married Put

  59. Modidor

  60. Multi Index Option

  61. Multi-Leg Options Order

  62. Naked Call

  63. Naked Put

  64. Negative Butterfly

  65. Net Option Premium

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  68. Outright Option

  69. Overwrite

  70. Overwriting

  71. Positive Butterfly

  72. Protective Put

  73. Put

  74. Put Calendar

  75. Put Ratio Backspread

  76. Ratio Call Write

  77. Ratio Spread

  78. Reverse Calendar Spread

  79. Reverse Conversion

  80. Risk Reversal

  81. Roll Down

  82. Roll Forward

  83. Roll Up

  84. Seagull Option

  85. Sell To Open

  86. Series 4

  87. Short Leg

  88. Short Straddle

  89. Straddle

  90. Strangle

  91. Swing Option

  92. Synthetic Dividend

  93. Variable Ratio Write

  94. VIX Option

  95. Writing An Option

  96. Zero Cost Collar

  97. Zomma

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