20. Put Ratio Backspread

Scenario:

The trader is getting very nervous about the stock market. He is sure that the market is overvalued, but not sure when the break will occur. Also, the trader does not want to stand in front of a runaway bull market. This trader is will to NOT participate in upside gains to be certain that the position will be held when the market drops dramatically. He consequently enters into a put ratio backspread.

Specifics:
Underlying Futures Contract:	December S&P 500
Futures Price Level:	940
Days to Futures Expiration:	105
Days to Options Expiration:	105
Option Implied Volatility:	16.2%
Option Position:	Short 1 Dec 930 Put	+ 7.10 ($1775.00)
	Long 2 Dec 920 Puts	- 4.00 ($1000.00) x 2
		- 0.90 ($ 225.00)

At Expiration:
Breakeven:	909.10 (920.00 strike - 10.00 difference between strikes - 0.90 debit).
Loss Risk:	Limited; losses bottom out at strike of long puts. At 920.00 the maximum loss of 10.90 ($2725.00) occurs.
Potential Gain:	Unlimited; gains mount as futures fall past 909.10 breakeven.

Things to Watch:

Depending on the exact strikes chosen, a trader could come away with a small gain or loss if futures continued their rally. The worst scenario is to have a mild bear market with volatility dropping.

Follow-up Trading Strategies