Ratio Spread Strategy Adjustment | Best Ratio Spread Option Strategy | Call and Put Ratio Spread in Options | Open Free Account Online and Start Trading Today !
Discover the best ratio spread strategy in options trading and learn how traders can use its various types in their daily trading. Check call ratio spread, put ratio spread and double ratio spread adjustment to earn maximum profit. Besides this, also learn how to set-up these ratio spread option strategy, their benefits and strategies to manage the risk.
Unlocking the Potential of Ratio Spread Strategy in Options Trading
Nature has taught us one big lesson: to balance everything, no more, no less, everything in its right proportion. In the same way, trading can also be successful when traders balance their risk-to-reward ratio. To manage this ratio spread adjustment, traders apply a ratio spread strategy, whether a call ratio spread, a put ratio spread, or a double ratio spread. In this article, we shall explore the ratio spread option strategy, its different types, how it works, and how it can benefit traders.
What is a Ratio Spread Strategy ?
A ratio spread strategy in options involves buying and selling options contracts of the same type but in different quantities. Generally, traders buy one option contract and sell more than one contract at different strike prices, which helps them reduce the overall cost of the position.
The main advantage of this strategy is to benefit from the small market movements and keep the risk levels minimum.
Types of Ratio Spread Option Strategy
For different market scenarios, there are various ratio spread strategies in options and ratio spread adjustment. Let us check them below.
1) Call Ratio Spread strategy
The call ratio spread strategy is used when traders expect a moderate increase in the underlying asset's price. To apply this strategy, traders buy one call and sell two or more call options at the higher strike price. In this call ratio spread option strategy, the profit potential from upside movement is limited, but traders can get maximum benefit if the underlying asset's price stays within the specific range.
2) Put Ratio Spread Strategy
Traders use this strategy when they predict a slight decline in underlying asset prices. To apply this strategy, traders buy one put option and sell two or more put options at a low strike price. put ratio spread strategy makes a profit if the asset's price falls but stays within the expected range.
3) Double Ratio Spread
A double ratio spread option strategy is a combination of a call ratio spread and a put ratio spread. It is effective in both bearish and bullish market conditions. Traders generally apply this strategy when they are expecting high volatility but have no idea of direction.
Ratio Spread Strategy Adjustments
To manage the risk on the position, traders need to make a few ratio spread adjustment based on the market condition, they are as follows :
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Closing the part position - Traders can exit from a few portions of the spread and can lock the profit and avoid losses.
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Rolling the spread - As the name suggests, traders can either extend the expiry period of the contract or shift to a different strike price contract to bear the unexpected price change.
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Hedging the spread - Traders can hedge the position by adding extra contracts, for example long options can protect against uncertain price changes.
How the Ratio Spread Option Strategy Works ?
The ratio spread option strategy balances the number of options contracts bought and sold to create a risk-free position. Understand how ratio spread strategy adjustment works here :
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The trader first identifies the market as bullish or bearish.
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They buy one option, either call or put at a specific strike price.
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Along with that, they sell two or more contracts at a different strike price, this creates a ratio.
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The premium received from selling two or more contracts helps reduce the cost and may result in net credit.
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If the underlying asset's price remains within the range at expiry, traders make a profit.
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Losses are limited in this strategy but may increase if the price moves far from the range.
How To Set Up a Ratio Spread Strategy in Options ?
Setting up a ratio spread option strategy needs one to have thoughtful planning. Follow the below procedure to learn it.
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Choose the underlying asset for which you expect moderate price movement.
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Analyse the market direction to implement either call ratio spread or put ratio spread.
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Select the strike price and expiry dates of the contracts to create a risk-free ratio spread in options
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Then execute the transaction ( buy/sell)
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Monitor the market and make ratio spread adjustment if needed.
How do Traders Get Benefits from Using Ratio Spread Option Strategy ?
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Selling more contracts helps offset the cost of purchased options.
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Ratio spread strategy is more profitable in range-bound markets, where the asset is expected to move within a limited range.
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Risk exposure is limited compared to other strategies
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ratio spread adjustment is easy; traders can modify their position based on market conditions.
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By implementing a double ratio spread, the chances of potential earnings increase.
Pros and Cons of Ratio Spread Strategy
Pros :
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Offers cost-effectiveness due to selling more and buying less
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Ratio spread option strategy is perfect for a moderately volatile market
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Traders can manage the risk by ratio spread adjustment
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Suitable for bullish, bearish and highly volatile markets.
Cons :
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If the market moves in an unexpected range, the profit is limited.
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Traders need to monitor and adjust the position constantly
Conclusion
The ratio spread strategy in options trading is one of the best tools for traders seeking cost-effective exposure to the market. This strategy adjustment can make more profit with limited downside risks. By learning and implementing this call or put ratio spread option strategy, traders can enhance their overall performance and gain an extra edge in the market. If you have not yet implemented this strategy, start now and see the profits coming in!