Ratio Spreads
Trading ratio spreads is a neutral strategy with a medium risk level and high potential profits.
The strategy can be used with calls or puts and works best with a stock that has shown stability.
Put ratio spreads
How it works: A trader would buy a put at a higher strike price and sell a greater number of puts
at a lower strike price, preferably with little debit or a small credit. If the stock jumps the
puts will expire worthless. Our desired result is for the stock price to stay at the strike price
where you are short options.
The drawback: If the stock plummets you have unlimited risk, since you sold more options than you
bought.
Call ratio spreads
How it works: A trader would buy a call at a lower strike price and sell a greater number of calls
at a higher strike price, preferably with little debit or a small credit. If the stock jumps the
puts will expire worthless. Our desired result is for the stock price to stay at the strike price
where you are short options.
The drawback: If the stock soars upward you have unlimited risk, since you sold more options than
you bought.
|
