23 lines
1.4 KiB
Plaintext
23 lines
1.4 KiB
Plaintext
Ratio Spreads Using Puts
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The put option spreader may want to sell more puts than he owns. This creates a ratio
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spread. Basically, two types of put ratio spreads may prove to be attractive: the stan
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dard ratio put spread and the ratio calendar spread using puts. Both strategies are
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designed for the more aggressive investor; when operated properly, both can present
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attractive reward opportunities.
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THE RATIO PUT SPREAD
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This strategy is designed for a neutral to slightly bearish outlook on the underlying
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stock. In a ratio put spread, one buys a number of puts at a higher strike and sells
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more puts at a lower strike. This position involves naked puts, since one is short more
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puts than he is long. There is limited upside risk in the position, but the downside risk
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can be very large. The maximum profit can be obtained if the stock is exactly at the
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striking price of the written puts at expiration.
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Example: Given the following:
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XYZ common, 50;
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XYZ January 45 put, 2; and
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XYZ January 50 put, 4.
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A ratio put spread might be established by buying one January 50 put and simulta
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neously selling two January 45 puts. Since one would be paying $400 for the pur
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chased put and would be collecting $400 from the sale of the two out-of-the-money
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puts, the spread could be done for even money. There is no upside risk in this posi
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tion. If XYZ should rally and be above 50 at January expiration, all the puts would
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