For options traders, basic spreads are typically created on a ratio of A vertical spread has one long option for every short option. A straddle or strangle consists of the purchase or sale of one call and one put proportional spread options the same expiration date, and so on.
Think of it as a put vertical spread with the sale of an extra put at the lower strike. In fact, one strategy is to choose strikes such that more premium is collected on the sale of the two lower-strike puts than is paid to purchase the higher-strike put. In other words, the spread is initiated for a net credit.
See figure 1. This position maximizes gains if the stock drifts down to the short strike.
Relative Proportional Spread Archives - Exploring TM1
For illustrative purposes only. If the stock stays where it is or goes up, you're likely to keep the net premium, minus transaction costs.
If it drifts down to your long put strike, you reach your point of maximum profit. Selling that extra put exposes you to the risk profile of a long stock position if the stock is below the lower strike at expiration.
Proportional Proposal: An Intro to Put Ratio Options Ticker Tape
And like any long stock in your portfolio, the downside risk can take you all proportional spread options way to zero. Past performance does not guarantee future results.
Remember: the put ratio is essentially a long vertical put spread with an extra short put. This is what helps lower the breakeven point on this trade 3. And what if the stock goes up?
When volatility is lower, the opposite will likely be true. Then, choose a strike closer to at-the-money ATM.