Put Ratio Backspread
Composition
Sell 1 ITM(In The Money) put option and buy 2 OTM(Out The Money) put options. Ends in a net credit position.
Risk / Reward
Max Reward: Unlimited upside potential and limited on the downside potential.
Max Risk: Limited to the difference between the two strikes plus the net premium (Usually a credit for this trade).
Characteristics
The call ratio backspread is similar to a Long Straddle except the loss on the upside is limited.
Best used when trader is bullish on volatility but bearish market price and movement is expected to be quick. By looking at the risk profile above, note that you profit when prices move up as well, although the major gains are if the market falls.
A Ratio Backspread looks a lot like a Long Straddle except the payoff flattens out on the upnside. Another important difference is that Put Ratio Backspreads are usually done at a net credit. That is, the net difference for both legs means that you will be receiving money into your trading account up front instead of paying (debit) for the spread put on.
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