Episode 19 - Ratio Spreads

Episode 19 - Exploring Ratio Put Spreads

Description: In "Episode 19 - Exploring Ratio Put Spreads," Koen Hoorelbeke and Peter Siks delve into the strategic intricacies of ratio put spreads. This episode is essential for traders looking to understand and implement this advanced options strategy to manage risk and optimize returns.

Understanding ratio put spreads:

• Normal put spread: Involves buying a put and selling another put at a lower strike price.
• Ratio put spread: Involves buying one put and selling two puts at a lower strike price.
• Example: With a stock at $100, buy a 95 put and sell two 90 puts.

Benefits and risks:

• Potential for credit: Ratio put spreads can be set up for a small credit or at even money.
• Protection: Offers downside protection with a cushion, making it profitable if the stock declines moderately.
• Maximum profit scenario: Achieved if the stock price is at the short put strike price at expiration.
• Break-even point: Calculated based on the credit received and the strike prices involved.
• Risks: If the stock drops significantly, the position can become loss-making, similar to a naked put.

Example analysis:

• ASML example:
  • Stock trading at €880.
  • Normal put spread: Sell August 800 put, break-even at €825.
  • Ratio put spread: Buy 820 put, sell two 800 puts, break-even at €765.

Strategies and adjustments:

• Market monitoring: Requires active monitoring, especially in declining markets.
• Adjusting positions: If the market declines, traders can sell the long put and buy lower strikes to limit losses.
• Comparison to naked puts: Ratio put spreads can be a more strategic alternative to naked puts, offering a profit cushion and lower break-even points.

Conclusion: Ratio put spreads are suitable for active traders who usually sell naked puts. They offer potential maximum profit scenarios and a lower break-even point but come with the risk of becoming loss-making if the stock drops significantly. Traders should use tools like P&L graphs to visualize outcomes and make informed decisions.

In "Episode 19 - Exploring Ratio Put Spreads," Koen and Peter provide valuable insights and practical advice for traders to effectively use ratio put spreads in their trading strategies. Tune in to enhance your understanding and improve your trading performance with this advanced options strategy.