Ratio Spread
A Put Front Ratio Spread is a neutral to bearish strategy that is created by purchasing a put debit spread with an additional short put at the short strike of the debit spread. The strategy is generally placed for a net credit so that there is no upside risk.
Directional Assumption: Neutral to slightly bearish
Setup:
- Buy an ATM or OTM put option
- Sell two further OTM put options at a lower strike
Ideal Implied Volatility Environment : High
Max Profit: Distance between long strike and short strike + credit received
How to Calculate Breakeven(s): Short put strike - max profit potential
Front Ratio Call Spread
A Call Front Ratio Spread is a neutral to bullish strategy that is created by purchasing a call debit spread with an additional short call at the short strike of the debit spread. The strategy is generally placed for a net credit so that there is no downside risk.
Directional Assumption: Neutral to slightly bullish
Setup:
- Buy an ATM or OTM call option
- Sell two further OTM call options at a higher strike
Ideal Implied Volatility Environment : High
Max Profit: Distance between long strike and short strike + credit received
How to Calculate Breakeven(s): Short call strike + max profit potential
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