What if you could make money if the market goes up, and make even more money if the market goes down?
If this strategy sounds like something you’d like, then you want to use the Put Ratio Spread.
The Put Ratio Spread is a very powerful Option strategy that can help you make money regardless if the market goes up, goes sideways, or goes down.
That’s why it’s called an omnidirectional strategy because it makes money regardless of where the market goes.
So when trading the Put Ratio Spread, there are two ways to trade it:
- Trade it as a means to get into a Long Stock position (either for your long-term stock portfolio, or as part of the Wheel Strategy).
- Trade it as a high-probability Option trade without getting into a Long Stock position.
For this article, we will be focusing on the former.
So first of all, what exactly is the Put Ratio Spread?
What is the Put Ratio Spread?
The Put Ratio Spread consists of the following:
- Selling a Cash Secured Put.
- Buying a Bear Put Spread (aka Long Put Spread).
For selling a Cash Secured Put, you will receive a premium for it.
And the idea here is to use that premium to purchase a Bear Put Spread.
So in essence, you are using the premium you receive from selling a Cash Secured Put to finance the purchase of a Bear Put Spread.
That means you want to buy the Bear Put Spread for lesser than the premium you receive for selling the Cash Secured Put.
So for example, if you receive $2.44 for selling the Cash Secured Put, then you want to purchase the Bear Put Spread for less than $2.44.
In the above image, you can see that when you sell the Cash Secured Put for $2.44, and purchase the Bear Put Spread for $2.18, it will leave you a credit of $0.26.
And this equates to $26 for each Put Ratio Spread you sell.
So overall, you still will receive a credit for selling the Put Ratio Spread.
In the event that the underlying stock goes up, you at least will still keep the credit you receive for selling the Put Ratio Spread.
Why Trade the Put Ratio Spread?
So why trade the Put Ratio Spread?
What are the advantages of selling the Put Ratio Spread?
There are six good reasons why you want to trade the Put Ratio Spread.
Reason #1: A Multidirectional Strategy That Profits In All Directions
One of the big advantages of trading the Put Ratio Spread is its wide zone of profit.
Furthermore, if you already plan to get Long the underlying stock, then using the Put Ratio Spread can only further enhance any profits you make from buying the stock.
And it also helps reduces the cost-basis of buying the stock.
Reason #2: A Great Way To Get Into A Long Stock Position
If you were to use the traditional way to get into a Long Stock position, it means to place a Limit Order below the current stock price, at the desired price you wish to get Long at.
And the only way you can get Long the underlying stock is if the stock goes down to your Limit Order.
But if the stock doesn’t go down, then you won’t get filled on your Limit Order.
Which also means there’s no chance of you making any money.
But if you were to sell a Put Ratio Spread, even if the stock doesn’t go down to your desired price level, you would at least still be able to keep the premium for selling it.
Reason #3: Get Paid To Get Into A Long Stock Position
And if the stock does go down and you get assigned on your Cash Secured Put, you would also receive a payout from selling the Bear Put Spread portion of the Put Ratio Spread.
You see, when the stock goes down past your Cash Secure Put strike, it means the Bear Put Spread portion of the Put Ratio Spread is now in profit.
So by selling off the Bear Put Spread, you will make a nice profit in addition to getting Long the underlying stock.
There’s no better way to get into a Long Stock position than to get paid to get into one!
Reason #4: The Put Ratio Spread Is Very Flexible
For example, if you were slightly more bullish on the underlying stock, you could shift the Bear Call Spread portion closer to the current stock price.
This way, in the event that the stock does go down but it doesn’t go past your Cash Secured Put strike price, you would still make money.
That’s because you would be profiting on the Bear Call Spread.
And if you are slightly more bearish, you can simply adjust the Bear Call Spread closer to your Cash Secure Put strike price.
This way if the stock goes below your Cash Secured Put strike, you’d make more money on your Bear Put Spread.
Reason #5: A Mini Hedge Against A Bullish Portfolio
If you have many bullish positions in your portfolio, then selling a Put Ratio Spread can help mitigate some risk in the event the stock goes down.
That’s because the Put Ratio Spread makes the most money when the stock goes down.
So if you have a very bullish portfolio, you can put on a Put Ratio Spread where the Bear Call Spread is closer to the Cash Secured Put strike price.
And this brings me to the final reason…
Reason #6: Make More Money When The Stock Goes Down
Because the Put Ratio Spread makes the most money when the stock goes down, it will help with your psychology as well.
Typically, most people will want the stock market to go up.
But when the stock market goes down, they panic and start worrying.
With a Put Ratio Spread, you want the stock to go down.
So when you have a Put Ratio Spread on, you aren’t as worried because you have an opportunity to make profits if the stock goes down.
This will help your psychology better, and allow you to make more rational decisions when it comes to trading.
How To Trade The Put Ratio Spread Like A Pro
Here’s an example of how to place a Put Ratio Spread:
Let’s say you decide to get Long Google at the $102.50 price.
So for this Put Ratio Spread, we’ve constructed the Put Ratio Spread with the strike price at 102.5/110/112.5.
And for this, we receive a credit of $1.12 (which equates to $112 per Put Ratio Spread).
When putting on the Put Ratio Spread (or any Option trade), we must always have a game plan for what we will do based on different scenarios.
We need to know what we will do at every step of the way so we don’t get caught off guard.
This way, you will always be prepared and nothing the stock does will surprise you.
So we must plan every scenario that can possibly happen and know exactly what to do when that scenario happens.
So there are a few scenarios that can happen after placing our Put Ratio Spread.
Scenario #1: Google is above $112.50 at expiration.
If Google is above $112.50 at expiration, then it means we will just receive the full premium for selling this Put Ratio Spread.
Our profit in this scenario is $112.
So although we weren’t able to get Long Google at our desired price at $102.50, we at least still received some money for selling the Put Ratio Spread.
Scenario 2: Google is in-between $110 and $112.50 at expiration.
So what happens if Google is below the Long Put strike but above the Short Put strike of your Bear Put Spread on expiration day?
First of all, the Cash Secured Put part of the Put Ratio Spread would expire worthless.
Secondly, your Bear Put Spread would be in a profit because it has gone below your Long Put strike.
However, it’s important not to take the Bear Put Spread into expiration because if you do, then your broker would automatically exercise your Long Put, which means you will be Short 100 Shares of Google at $112.50!
So usually on expiration day, you want to close the Bear Put Spread if the stock is trading in between the two strikes.
Overall, you would be collecting the profit of the $112 (for selling the Put Ratio Spread), plus the profits from selling the Bear Put Spread.
Scenario 3: Google is between $102.50 and $110 at expiration.
First of all, your Cash Secured Put part of the Put Ratio Spread will expire worthless.
Secondly, you will get the maximum profit on your Bear Put Spread.
So although you won’t be Long Google stock, you will a total profit of $112 + $250 = $362 for this scenario!
And unlike scenario 2, there’s no need to close your Bear Put Spread prior to expiration because your broker will net off the Long Put with the Short Put that’s both In-The-Money (ITM).
Scenario 4: Google is below $102.50 at expiration.
If Google is below $102.50 at expiration, two things will happen.
The first is that you will receive the same maximum profit as scenario 3 which is $362.
The second is on top of getting the $362 in profits, you will also now be the proud owner of 100 shares of Google at $102.50, which is what you initially wanted in the first place!
In conclusion, if you already plan to buy a stock at a certain price, then the best way to do so is with a Put Ratio Spread.
Because this way, not only are you able to get Long the stock, but you can also get a hefty payout for doing so!
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