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# Ratio Strategy

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

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. ### asdfghj7

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. ### JJacksET4

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.

JJacksET4

5. ### dagnyt

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?

Mark

6. ### spindr0

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

asd,

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?

7. ### JJacksET4

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.

JJacksET4

8. ### dagnyt

"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

Mark

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
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