Put Ratio Backspread

Put ratio backspread

A complex options strategy adopted when one believes a stock price will decline but wants to protect against it rising.

---

Put Ratio Backspread

A bearish investment strategy in which an investor sells a put option at a high strike price and then uses the proceeds from that sale to buy two or more put options at a lower strike price. The puts have the same underlying security or asset, and, ideally, have the same premiums; most importantly, they must have the same expiration date. If the underlying moves modestly in the direction the trader wants, he/she can realize exceptional profits; however, even if the underlying moves away from the trader, he/she can make a small profit or at least break even. This is a hedging strategy in which the investor is likely to attain neither significant profit nor loss, but may return a modest profit. Risk is limited to the premiums of the puts bought, and profits are theoretically (though rarely actually) unlimited. This is a favored investment strategy of many risk-averse option traders. See also: Call Ratio Backspread.