A Put Ratio Spread is neutral to a bearish strategy that is placed by buying one ATM put option and short two OTM put options. The strategy generates a net credit and therefore there is no risk to the upside.
Aurobindo Pharma has moved by more than 50% in last one and half month and by more than 10% in past few days and today by 6% on the news that it got USFDA approval for Sevelamer suspension & tablets.
The assumption here is that either Auropharma will do a small pull back or stay here in sideways mode.
A put ratio spread options strategy is perfect for this kind of situation. The strategy gets even better when Implied Volatility of the stock is very high. As of yesterday, the IV percentile of Auropharma is 95.5 and therefore we can take advantage of this and place a put ratio spread. Track IV Percentiles here
Put Ratio Spread Setup for Auropharma:
> Buy one ATM put option – We buy 780 PE at Rs 23.3
> Short two OTM put options – We short two 760PE ar Rs 13.7
Here, we receive a net credit of Rs 4.1 (27.4-23.3)
The Payoff for this strategy on Auropharma at expiry is shown in the chart.
The maximum profit potential for this strategy is the distance between long put strike and short put strike plus the credit received. In this case, the maximum profit will be 19,280 calculated as 20 (distance between short/long strike) + 4.1 (credit Received) * 800 (lot size)
The breakeven for this strategy is – Short put strike – max profit potential. In our case, it will be 735.9 (760-24.1)
The good thing about put ratio spread strategy is that it has no upside risk.
Explore all options strategies including call ratio spread here – option strategies
For the most part, this position has been at cost or slightly positive. But with an unidirectional move to the downside, Auropharma stock is testing our breakeven. So decided to exit at a small loss of Rs 1520.
Sold 780PE at 38 – Profit of 14.7 (38-23.3)
Covered 2 lots 760PE at 22 – loss of 16.6 (22-13.7 * 2)
Net Loss = 16.6-14.7 = 1.9 * 800 (lot size) = Rs 1520