Strategies · Library · Options
§2.37Volatility
Put ratio backspread
Sell a few puts near the money and buy more puts further out of the money. It pays on a sharp drop, with a modest loss if the price rises and a deeper loss if it sinks only a little.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Strongly bearish, expecting a large and fast decline; a slow grind down or a flat market is the worst case.
- Entry and exit
- Sell, say, one put near the money and buy two puts at a lower strike, same expiry. Hold to expiry, or close after a crash or if the thesis fails.
- Sizing
- Long puts outnumber short puts, typically 2 to 1 or 3 to 2
How it fails
- Largest loss occurs if the price settles at the lower strike, where the short put has cost money and the long puts expire worthless
- A rise leaves only a small loss or a small credit kept; time decay works against the extra long puts
- Gain on a collapse is large but bounded because the price cannot go below zero
Data it needs
- options chain with strikes and premiums
- implied volatility
- underlying daily price
ARCANE has the underlying daily close but no options chains or implied volatilities
How ARCANE uses it
A Call that an asset crashes by a large amount by a date, rather than drifting lower, matches this view; paper only.
Needs options and a bearish payoff; long-only holding cannot profit from a fall.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.37, p. 32 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.