Ratio Strategy

Discussion in 'Options' started by asdfghj7, Mar 24, 2009.

  1. I've been recently been developing a strategy generally focused around the idea of a ratio spread trade where an ITM/ATM/or OTM call or put is purchased by the buyer, who finances it with 2 further OTM options in the same month or buying one option and financing it with a higher strike further out month option. Either way, resulting in a zero debit, and maybe even a credit. Example, if a stocks at 50, buy a June 2009 ATM call for 6pts and sell two June 60 calls for 3pts each. I'm continue to ponder different ways to structure this. Regardless of how the method will initially be set up, I'm banking that an adjustment to the trade will be the cornerstone to it's probability of producing a profit based on locking in a profit shortly after the position has been opened. I've looked at regular and advanced collars, different ratios, married puts, and how different calendar spreads react differently when added to the basic strategies. I've been taking each idea and seeing what happens if I do this or that after its initiated, or starting off in different calendar months. An example would be long the stock at 100, long a six month put at 100 for 5pts and short a twelve month put at 130 for 5pts. If this doesn't work, then in six months I'll do it again to breakeven or a small profit by adjusting, doubling or whatever. I love how a ratio spread trade is profitable from the start, however, the markets ability to go up or down too fast continually looms and may not give me the oppurtunity to adjust the naked call or put in the ratio spread trade. I also thought of doing a ratio spread trade to the short side only by buying a 10 put and selling two $5 puts to pay for it. If the market goes to zero, thats a much better position than a 10 call purchased with two 12.50 calls and the market goes to the moon. I would be very appreciative for any suggestions from like minded individuals who share a love for trading ideas. Whether its a book referrel, website, or personal experience. I've read Cottle, Natenburg, Wolfinger (hey Mark) Mcmillan, Cook, Elias, Kaeppel, Fontanils, Budwick, Najarian, Smith, Demark, and many many others. Its fascinating. Please personally messege me. I've often noticed that the first or second person who answers a question, usually ends up having to deal with some other trader who doesn't agree. Thanks for the time. I do appreciate it.
  2. Nanook


    Huge paragraph you have there which makes it confusing to read.

    Your twelve month 130 Put would be worth at least 30 points. Maybe it was a 90 or 95 Put you meant?
  3. Your right. It should be long the stock at 100, long an ATM 6 month put for $5pts and short a 12 month 130 CALL for $5. Thanks Nanock
  4. asdfghj7, regarding the possibility that a stock could go to the moon and cause unlimited losses, remember that you are not glued to strategies as they are written up in books, etc. You could simply add farther out of the money calls to protect you in this scenario.

    I have done this myself. An example would be with XYZ at $50,
    Buy 50 Call XYZ (pay $500)
    Sell (3) 60 call XYZ $300 each (get $900)
    Buy (3) 80 Call XYZ $60 each (pay $180)

    Credit = $900 - 500-180 = $220

    So, of course buying the protection calls costs some credit, but at least it allows a person to do the trade (most traders wouldn't even be able/allowed to do the trade without them because of the uncovered calls). Of course, in the example trade shown, you would also make extra profit if the stock was in the $50-$60 range at expiration because of the long 50 call.

  5. Hey asd,

    That position is much easier traded by using its equivalent:

    Long: 6 month call at 100
    Short: 12 month put at 95

    Is that really the position you want to own?

  6. spindr0


    I'm not sure whose typos I should respond to (g). I think Asd fixed his. Mark, is that your final answer?


    In order to get a 10 pt ratio for a credit,, you're going to be in higher rather than lower IV options, unless you go out more months. Nothing wrong with that other than you can expect to have the positions tested.

    While adjustments play an important role in a position's ultimate P&L, you need more than that for ratios to be successful (some amount of timing and pick-ability).

    I'm puzzled by your position of "long the stock at 100, long a six month put at 100 for 5pts and short a twelve month call at 130 for 5pts" which is a reverse ITM diagonal write. What makes it attractive to you? Also, why do you think that ratio spreads are profitable from the start?

    I guess the better question would be, what are you trying to achieve with ratios?

    BTW, nice reading list!
  7. Of course, I'm guessing here, but I think the OP is either saying that there is a credit up front - which of course is different then a profit from the start or he is saying that if the stock doesn't move much it quickly becomes profitable - which of course can quickly be ruined by either large movement in the wrong direction of the stock and/or large IV increase.

  8. "Long: 6 month call at 100
    Short: 12 month put at 95"

    No. I noticed the typo changing the strike to 95 from 130. But I missed the call vs put.

    Long 6 month all at 100
    Short 12 month call at 95

    Final answer.

  9. spindr0


    I inferred the same but inferring is kinda like assuming so I'll wait for his final answer as well :)
  10. spindr0


    95 call? Do you have any lifelines left? :)
    #10     Mar 25, 2009