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