A Put Ratio Spread is an options trading strategy that involves simultaneously buying a certain number of out-of-the-money put options and selling a larger number of further out-of-the-money put options on the same underlying asset with the same expiration date. This strategy is structured to profit from a moderate decline in the asset’s price, but it carries significant risk if the price falls substantially below the short put strikes.
Mechanism
The strategy’s operational structure generates a net credit or debit depending on the chosen strike prices and the premiums exchanged. The purchased put option provides some downside protection up to its strike, while the larger quantity of sold puts generates premium income. The risk profile is characterized by limited profit potential within a specific range, maximum profit at the short strike price, and considerable downside risk if the underlying cryptocurrency’s price drops below the short strike.
Methodology
Institutional options traders employ put ratio spreads when they anticipate a slight to moderate bearish movement in an underlying crypto asset and aim to capitalize on time decay and implied volatility differentials. The methodology involves precise selection of strike prices and ratios to define the exact risk-reward parameters, carefully balancing the collected premium against the potential for substantial losses if the market moves aggressively against the short put positions.
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