Bearish Put Ratio Backspread
Bearish Put Ratio Backspread – Sell higher strike Puts and buy a greater number of lower strike Puts (1 to 2 or 2 to 3) in a market with a forward volatility skew where you anticipate a sharp price decline with increasing volatility. Look for even or net credit trades where possible on options with greater than 90 to 180 days until expiration.
Entry Rules
Strong long term Bearish expectations (possible breakdown) for the underlying asset.
Low Implied Volatility resulting in cheap options.
Enter at break even or a credit.
Exit Rules
- Close position with 30 days to expiration if stock price is between breakeven price points.
- Let options expire worthless if stock price is above higher lower breakeven price.
- Exit position if stock reaches your target price.
- If position is profitable, but the stock price doesn’t look like it will go any lower, exit the entire position, or consider selling one profitable Put, and hold on to the position as a Bull Put Spread.
Profit & Loss Calculations
Maximum Risk - Limited to # short Puts X strike price difference - net credit or + net debit
Maximum Profit - Unlimited on the downside below the breakeven, limited on the upside to the net credit if any
Upside Breakeven = Higher Put strike price - net credit or + net debit
Downside Breakeven = Lower Put strike price +[(strike price difference X # short Puts)/(# long Puts -# short Puts)] + net credit or - net debit
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