Put Ratio Spread Retirement Strategy

Introduction

• Focus on a single option strategy for retirement.
• Suggested strategy: Put Ratio Spread.

What is a Put Ratio Spread?

• Combination of two strategies:
  • Short Put:
    • Sell put option to receive premium (credit).
  • Long Put Spread (or Put Debit Spread):
    • Buy a put spread, paying a premium.
• Structure:
  • 2 short puts + 1 long put.
  • The short puts share the same strike price.

Risk Assessment

• Concern: More short puts = double the risk?
  • Not double the risk due to coverage by the long put.
• Strategy viewed as a long put spread with an additional short put.

Example Construction

• Sell 1 short put, receive $3 credit.
• Buy long put spread for $1.
• Total credit received = $2 ($200 per put ratio spread).

Defensive Measure

• Why add long put spread?
  • Acts as a hedge against market downturns.
  • Protects against losses from the short put.
• Combination of bullish (short put) and bearish (long put spread) strategies.

Scenarios for Profit

1. Stock expires above put ratio spread:

   • Profit = full credit received.
   • Example: $2 credit results in $200 profit.

2. Stock between short puts and long puts:

   • Profit as long as it stays near expiration.
   • Closing the spread for profit.

3. Stock goes below put ratio spread:

   • Still profitable if managed correctly.
   • Separate components (short put and long put spread) if stocks go below.
   • Two methods:
     • Leave to expiration (may get assigned).
     • Roll the short put to a later date.

Risk Management Strategies

• Watch List: Keep stocks you don't mind owning.
• Identify Undervalued Stocks: Use tools like Simply Wall Street or Morning Star.
• Wait for Good Setups:
  • Use stochastic oscillator to assess market conditions (overbought vs oversold).
  • Identify support levels where prices bounce back.

Trade Construction

• Days to Expiration (DTE):
  • Preference for above 45 DTE for better risk management.
  • Shorter DTE = higher ROI, but less premium for long put spread.
• Strike Price Selection:
  • Choose a strike price where you don’t mind going long on shares.
  • Use delta to select risk based on probability of being in-the-money.

Long Put Strike Selection

• More bullish: Further out-of-the-money strikes.
• More bearish: Nearer the current market price.

Conclusion

• Summarize the put ratio spread as a retirement strategy.
• Encourage feedback and further engagement.