Bear Ratio Spread

A Bear Ratio Spread involves buying one put option at a higher strike price and selling multiple put options at lower strike prices. It profits from moderate price decreases but carries higher risk if the price falls sharply.

• Ideal for moderately bearish conditions, where a limited price drop is expected.
• Buying an ATM put and selling OTM puts reduces the initial cost and increases premium income.
• Risk increases significantly if the price falls sharply beyond the sold strikes.
• Profit is capped if the price drops moderately within the range of sold strikes.

Example:

• BANKNIFTY trading at 42,000.
• Buy 42,000 Put at ₹200 and sell 2 × 41,800 Puts at ₹100 each (lot size = 25).
• Outcome:
  1. If BANKNIFTY falls to 41,800 at expiry:
     • Gain on bought put = ₹200 × 25 = ₹5,000.
     • Loss on sold puts = ₹0.
     • Net profit = ₹5,000 − ₹0 − ₹2,500 (net premium) = ₹2,500.
  2. If BANKNIFTY falls to 41,600 at expiry:
     • Gain on bought put = ₹400 × 25 = ₹10,000.
     • Loss on sold puts = ₹200 × 25 × 2 = ₹10,000.
     • Net loss = ₹10,000 − ₹10,000 − ₹2,500 = ₹2,500.
  3. If BANKNIFTY stays above 42,000 at expiry:
     • All options expire worthless.
     • Net loss = ₹2,500.