Chapter 06 · Section 6.1
Ratio Backspread-Bearish
This ratio backspread is 45 days before expiration.
Considering only the bearish side of the market, which of the following statements are true?
a) An increase in volatility decreases profit/loss.
b) An increase in volatility increases profit/loss.
c) The passage of time decreases profit/loss.
d) The passage of time increases profit/loss.
e) b and c
f) a and b
The bearish side of the market simply means the side of the market when the price falls.
On the bearish side of the market, your position is net long put options. Long options will increase in value as volatility increases.
Remember the effect of time decay from the previous topic on call ratio backspreads. With long options positions, the only value left at expiration is intrinsic value. Time value is zero.