This strategy is implemented by buying 1 Put Option i.e. a single position, when the person is bearish on the market and expects the market to move downwards in the near future.
Risk: The maximum loss will be the premium amount paid.<
As the name suggests, a ratio of 2:1 is followed i.e. buy 1 ITM Call and simultaneously sell OTM Calls double the number of ITM Calls (In this case 2). This strategy is used by trader who is neutral on the market and bearish on the volatility in the near future. Here profits will be capped up to the premium amount and risk will be potentially unlimited since he is ..
Upper Breakeven Point = Strike Price of Short Calls + (Points of Maximum Profit / Number of Uncovered Calls), Lower Breakeven Point = Strike Price of Long Call +/- Net Premium Paid or Received
LONG PUT Vs RATIO CALL SPREAD - When & How to use ?
LONG PUT
RATIO CALL SPREAD
Market View
Bearish
Neutral
When to use?
A long put option strategy works well when you're expecting the underlying asset to sharply decline or be volatile in near future.
This strategy is used by trader who is neutral on the market and bearish on the volatility in the near future. Here profits will be capped up to the premium amount and risk will be potentially unlimited since he is selling two calls.
Action
Buy Put Option
Buy 1 ITM Call, Sell 2 OTM Calls
Breakeven Point
Strike Price of Long Put - Premium Paid
Upper Breakeven Point = Strike Price of Short Calls + (Points of Maximum Profit / Number of Uncovered Calls), Lower Breakeven Point = Strike Price of Long Call +/- Net Premium Paid or Received
LONG PUT Vs RATIO CALL SPREAD - Risk & Reward
LONG PUT
RATIO CALL SPREAD
Maximum Profit Scenario
Profit = Strike Price of Long Put - Premium Paid
Strike Price of Short Call - Strike Price of Long Call + Net Premium Received - Commissions Paid
Maximum Loss Scenario
Max Loss = Premium Paid + Commissions Paid
Price of Underlying - Strike Price of Short Calls - Max Profit + Commissions Paid
Risk
Limited
Unlimited
Reward
Unlimited
Limited
LONG PUT Vs RATIO CALL SPREAD - Strategy Pros & Cons
LONG PUT
RATIO CALL SPREAD
Similar Strategies
Protective Call, Short Put
Variable Ratio Write
Disadvantage
• 100% loss if strike price, expiration dates or underlying stocks are badly chosen. • Time decay.
• Unlimited potential loss. • Complex strategy with limited profit.
Advantages
• Limited risk to the premium paid. • Less capital investment and more profit. • Unlimited profit potential with limited risk.
• Downside risk is almost zero. • Investors can book profit from share prices moving within given limits. • Trader can maximise profit when the share closes at the upper breakeven point.
