Online Trading Concepts

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# Put Ratio Backspread Profit & Loss Graph

Put Ratio Backspread

1. Bear Put Ratio Backspread
2. Bear Put Ratio Backspread Profit, Loss, & Breakeven
3. Bear Put Ratio Backspread vs Buying a Put

The following is the profit/loss graph at expiration for the Bear Put Ratio Backspread in the example given on the previous page.

## Break-even

The breakeven point for the bear call ratio backspread is given next:

• Breakeven Stock Price1 = Sold Call Option Strike Price - Net Premium Sold (Cost of Options Sold - Cost of Options Purchased). Note: This breakeven might not exist with every bear put ratio backspread a trader trades (i.e. if there is net premium purchased rather than sold).
• Breakeven Stock Price2 = Sold Call Option Strike Price - 2 x Distance between strike prices of the call sold and the calls purchased + Net Premium Sold or - Net Premium Purchased.

To illustrate, the trader sold the \$50.00 strike price put option for \$1.34, and also bought two options at the \$47.50 strike price for \$0.44 each, for a net premium sold of \$0.46 (\$1.34 - \$0.88). The strike price sold was the \$50.00. Therefore, \$50.00 - \$0.46 = \$49.54. The trader will breakeven, excluding commissions/slippage, if the stock is above \$49.54 by expiration.

For the second breakeven, the distance between the two strike prices is \$2.50 (\$50.00 - \$47.50). Consequently, 2 times \$2.50 is \$5.00. The net premium sold was \$0.46. The sold put option strike price is \$50.00. Summing everything together, \$50.00 - \$5.00 + \$0.46 = \$45.46. As such, the two breakeven points are \$45.46 and \$49.54.

## Profit

The profit for a bear put ratio backspread is as follows:

• Bear Put Ratio Backspread Profit = Breakeven price - Stock price at expiration

To continue the example, if the stock price at expiration is \$44.00, then the profit would be \$146 [(\$45.46 - \$44.00) x 100 shares/contract].

To the upside, the max profit is \$46 anywhere above the strike price of the option sold. This profit area to the upside might not exist for all bear put ratio backspreads.

## Partial Loss

A partial loss occurs between the put strike price sold and the put strike price purchased. A partial loss also occurs between the point of max loss and the downside breakeven. The calculation is given next:

• Bear Put Ratio Backspread Partial Loss1 = (Strike Price of Option Sold - Stock Price at Expiration) - Net Premium Sold or + Net Premium Purchased

For example, if the stock price was \$48.00 at expiration and the strike price of the option sold is \$50.00 and net premium sold was \$0.46, then [(\$48.00 - \$50.00) + \$0.46] x 100 shares/contract = \$154 loss.

• Bear Put Ratio Backspread Partial Loss2 = (Downside Breakeven Stock Price - Stock Price at Expiration)

To illustrate, if the stock price at expiration was \$47.00 and the downside breakeven stock price was \$45.46, then [(\$45.46 - \$47.00) x 100 shares/contract] = \$154 loss.

## Max Loss

As stated previously, the max loss occurs at the strike price of the puts purchased. The formula is as follows:

• Bear Put Ratio Backspread Max Loss = (Strike price of put sold - Strike price of puts purchased) + Net Premium Purchased or - Net Premium Sold.

As an example, the strike price of the puts purchased is \$47.50, the strike price of the put sold is \$50.00, and the net premium sold is \$0.46: (\$50.00 - \$47.50) - \$0.46 = \$2.04 x 100 shares/contract = \$204.

Next Page - Bear Put Ratio Backspread vs Buying a Put