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Ratio Put Write
The ratio put write is a neutral strategy in options trading in which the options trader short sell the underlying stock and sells more puts than shares short.
| Ratio Put Write Construction |
| Short 100 Shares Sell 2 ATM Puts |
Like the ratio call write, it is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock price will experience little volatility in the near term.
Profit/Loss Potential
This strategy has the same risk/reward profile as the ratio call write. However, it is a highly inferior strategy because, firstly, while the ratio call writer gets to enjoy dividends, the ratio put writer has to pay them. Secondly, call options generally command higher premiums than put options.
The formula for calculating maximum profit is given below:
- Max Profit = Net Premium Received - Commissions Paid
- Max Profit Achieved When Price of Underlying = Strike Price of Short Puts
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| Ratio Put Write Payoff Diagram |
The formula for calculating loss is given below:
- Maximum Loss = Unlimited
- Loss Occurs When Price of Underlying < Strike Price of Short Put - Net Premium Received OR Price of Underlying > Strike Price of Short Put + Net Premium Received
- Loss = Price of Underlying - Sale Price of Underlying - Net Premium Received OR Strike Price of Short Put - Price of Underlying - Net Premium Received + Commissions Paid
Breakeven Point(s)
There are 2 break-even points for the ratio put write position. The breakeven points can be calculated using the following formulae.
- Upper Breakeven Point = Strike Price of Short Puts + Points of Maximum Profit
- Lower Breakeven Point = Strike Price of Short Puts - Points of Maximum Profit
Note: While we have covered the use of this strategy with reference to stock options, the ratio put write is equally applicable using ETF options, index options as well as options on futures.
Commissions
For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.
However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a flat fee of $9.95 per trade, regardless of the number of contracts.
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Similar Strategies
The following strategies are similar to the ratio put write in that they are also low volatility strategies that have limited profit potential and unlimited risk.
