|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.
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:
The formula for calculating loss is given below:
There are 2 break-even points for the ratio put write position. The breakeven points can be calculated using the following formulae.
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 low fee of only $0.15 per contract (+$4.95 per trade).
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.
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