The short ratio spread is a strategic options play in the Indian stock market where an investor sells a higher number of put options than they buy, resulting in a net short position. This setup typically involves selling more put options at a higher strike price while buying fewer put options at a lower strike price. The goal is to benefit from minor declines in the stock price, as the strategy profits from the premium received from the additional puts sold. Since more put options are sold than bought, the investor stands to gain if the stock price remains steady or experiences only a limited decline, allowing the options to expire with minimal losses. NSE and BSE offer platforms for executing short ratio spreads and provide necessary market data to monitor pricing and volatility, making it feasible for experienced traders to utilize this strategy in controlled environments.
However, the short ratio spread comes with considerable risk, as the potential for loss increases significantly if the stock price declines sharply below the lower strike price. This risk stems from the fact that the investor has taken on more open positions than are hedged by the options bought, exposing them to potentially large losses if the market moves unfavorably. As a result, the short ratio spread is most suitable when minimal stock price movement is expected and for markets anticipated to remain relatively stable. While the strategy can generate income from the net premium and benefit from time decay, it requires careful monitoring and management. NSE and BSE facilitate this approach by offering real-time insights, volatility indicators, and options analytics to help investors make informed decisions and adjust positions based on market conditions. Despite the high-risk nature, this spread can be an effective income-generating strategy in low-volatility markets when used with caution and expertise.
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Source: SEBI Study
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