An option strategy wherin the investor holds more long option positions than short option positions, of the same underlying security and the same expiry.
In this strategy, the investor buys a number of put options of a higher strike price and sells more put options of a lower strike price.
This strategy is also known as ‘Reverse Put Ratio Spread’.
A good rule of thumb is to use a 2:1 call back spread ratio while entering into this strategy.
When to use this strategy?
This strategy is designed for the more aggressive investors with a neutral to a slightly bearish outlook on the underlying asset.
How to build this strategy?
This strategy has two legs:
Sell 1 ITM Put
Buy 2 OTM Puts
This strategy has unlimited profit potential.
The maximum loss for this strategy is limited.
When is this strategy unprofitable?
The investor looses the maximum when the underlying stock price is at the strike price of the put options purchased.