The Ratio Put strategy is probably one of Hugo’s most exciting strategies. It is, however, primarily for experienced option/margin traders.
This Strategy has considerable potential in a bear market but an even higher risk during a crash. The timing could not be more important in a strategy!
The ratio put involves buying several put options and selling more put options. The underlying stock and the expiration are the same. The strike price of a larger number of puts is lower.
You can set the construction up without any payment but with the potential profits. That is the advantage of this Strategy. The downside is that the profits are limited, and the risks are significant. Using written options, especially with a higher amount, requires knowledge and experience. Hugo, therefore, advises preparing a strategy and a written plan to manage the risks involved.
An example of a ratio put spread:
Index AB, 700 points
+1 put 700 dec ’21, premium 34,00 euro
-2 put 640 dec ’21, premium per option 18,00 euro
As you can see, this order could be executed while receiving 2,00 euros (before costs). A margin is required because one of the puts is sold naked. Meaning that the value of that put could be (-/-) 64.000 euro if Index AB has a value of 0,00.
At the expiration in December ’21, the best situation would be an expiration price of 640. The sold option would expire worthlessly. The long put would have its maximum value of (700-640=) 60, together with the received premium of 2 points that would lead to a total profit of 62 points.
Without any management, the maximum risk of this Strategy at expiration would be the index expiring at 0. The bought put would have a value of 700 points, and the two sold punts would cost (2×640=) 1280 points. Together with the received premium, the risk is 578 points.
The option prices and the results may vary due to volatility and other factors. The higher number of sold puts gives a double exposure to the volatility.
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