The long ratio put spread is a 1×2 spread combining one short put and two long puts with a lower strike. All options have the same expiration date. This strategy is the combination of a bull put spread and a long put, where the strike of the long put is equal to the lower strike of the bull put spread.
The investor is looking for either a sharp move lower in the underlying stock or a sharp move higher in implied volatility during the life of the options.
The initial cost to initiate this strategy is rather low, and may even earn a credit, but the downside potential can be substantial. The basic concept is for the total Delta of the two long puts to roughly equal the Delta of the single short put. If the underlying stock only moves a little, the change in the value of the option position will be limited. But if the stock declines enough to where the total Delta of the two long puts approaches -200, the strategy acts like a short stock position.
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