Chapter 06 · Section 6.1
P/L Profile
How would the profit/loss profile of a put ratio backspread differ from a call ratio backspread?
a) Unlimited profit would be realized on the downside.
b) Limited profit would be realized on the downside.
c) The profit/loss profiles would not differ.
The put ratio backspread combines two long low exercise puts with one short high exercise put.
Consider the effect of combining the two positions. The short put has practically unlimited loss on the bearish side of the market while the long put has practically unlimited profit.
However, you are holding two long puts. This will offset the loss generated by the single short put position.
On the bullish side of the market, the long puts have a fixed maximum loss (i.e. the premiums paid) and the short put has a fixed maximum profit. This nets you a fixed maximum profit on the bullish side of the market.