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Short Bear Ratio Spread

 Profile Version / Simplified Version / Comprehensive Version

Purpose Of Short Bear Ratio Spread
1. To Profit From Falling Stocks
2. To Eliminate Upfront Payment For Put Options
3. To Protect Against Losses If Stock Rises Instead


Expectations Of Short Bear Ratio Spread
Down


Type Of Spread
Credit Spread


How To Use Short Bear Ratio Spread
A Short Bear Ratio Spread eliminates payment for At The Money (ATM) Put options by selling a smaller number of deep In The Money (ITM) put options.

Buy ATM Put Options + Sell ITM Put Options 		Short Bear Ratio Spread Risk Graph Learn How To Read This Chart

Profit Potential of Short Bear Ratio Spread :
The Short Bear Ratio Spread has an unlimited profit potential. It will keep making more profit as long as the underlying stock keep falling.

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Profit Calculation of Short Bear Ratio Spread:
Profit = ((long put strike - stock price) x number of Long Put Options) - ((short put strike - stock price) x number of short put options)

Maximum loss = Total Premium Value Of Long Put Options - Total Premium Value Of Short put options


Risk / Reward of Short Bear Ratio Spread:
Maximum Profit: Unlimited

Maximum Loss: limited
Maximum loss occurs when the underlying stock closes exactly at the strike price of the Long Put Options.

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Break Even Point of Short Bear Ratio Spread:
There are 2 breakeven points for a Short Bear Ratio Spread. The Lower Breakeven Point is point below which the position will start to make a profit. The Upper Breakeven Point is the point above which the position will lose only the net debit (if any).

Lower Breakeven Point = Strike Price Of Long Put Options - (Maximum loss / (number of Long Put Options - number of short put options))

Upper Breakeven Point = Strike Price Of the Short put options.


Advantages Of Short Bear Ratio Spread :

  • No upfront payment needed for the position.

  • No loss occurs if the underlying stock rises drastically instead of falls.

  • Unlimited profit potential


    Disadvantages Of Short Bear Ratio Spread :

  • Broker needs to allow the trading of credit spreads.

  • Makes less profit than a Long Put Option strategy on the same move in the underlying stock.


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