An experienced guide can remove some of the hardship
This morning my stockbroker called and asked if I’d like to be $900 richer, I quite liked the idea so I took his recommendation. And consequentially, my very first “Put Ratio Spread” has been profitable… So far - it’s not over yet!
Those who aren’t familiar with Option Trading are probably wondering what the heck a Put Ratio Spread is. About a week and a half ago I was wondering the same, so to better understand I decided to trade one, following a recommendation from my broker of course.
A Put Ratio Spread is buying 2 puts and selling 1 put. My broker explained the market was going to “bounce”, meaning the stock would rise in value for the short term but decline in the longer term. So the idea is to buy back the sold put after the stock bounces and sell the two bought puts after the stock has declined.
A plotted visualisation of a stock bouncing
Maybe that’s different to how some manage such spreads, but my broker prefers to close out positions the moment they become profitable, rather than waiting for options to expire. This perhaps results in lower profits but in an unpredictable market it also lowers the risk through less exposure time.
Sure enough the market bounced and I profited on that leg of the trade so now I’m waiting for the stock to decline. The nice part is this trade has limited loss potential but UNLIMITED profit potential. Of course the stock price may not decline and I’ll lose money, but my broker’s recommendations are usually profitable. So far 14 out of the 15 trades with this broker have been profitable.
Looking at the bigger picture, it cost me $1350 to enter the trade and I’ve already recouped $900 (minus brokerage), so if all goes according to plan the remaining $450 will be returned plus a tidy profit.
Sounds good doesn’t it?
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