Details about Profit & Loss Calculations for Ratio Put BackSpread Options Trading
Continuing further from our previous post Ratio Put BackSpread Options Trading Explained: Example & Payoff Charts , lets see the details about Profit & Loss Calculations for Ratio Put BackSpread.



What are the breakeven points for the Put Ratio BackSpread Options
Looking at the BROWN colored payoff function, we can see that the BROWN colored payoff function chart crosses the horizontal (x-axis) twice, and these points of intersection become the break even points for Put Ratio BackSpread Options Trade.
Upward Breakeven Point for Ratio Put BackSpread Options = [Higher ITM Put strike - net credit amount]
In the above case, it will be = $55 - $6 = $49

Downward Breakeven Point for Ratio Put BackSpread Options = [Lower OTM Put strike price] - [difference between strikes * number of short contracts] / [number of long Puts - number of short puts ] + [net credit received]

In the above case, it will be = $45 - [($55-$45)*1]/[2-1] + $6 = $45 - $10 + $6 = $41

What is the maximum profit for Put Ratio BackSpread Options
As can be seen from the BROWN colored payoff function, there are two profit regions in case of Put Ratio BackSpread Options trading position. One on the lower side and one on the higher side - both are capped or limited.
The lower profit region is slanting - i.e. the lower the underlying stock price goes the higher profit is made by the option trader.
On the higher side, the profit region is flat - capped to maximum of $6 in this case.

Maximum Profit of Ratio Put BackSpread Options = Net Options Premium Received - Brokerage & Commissions Paid (on the upside)
OR
Maximum Profit of Ratio Put BackSpread Options = Unlimited - Brokerage & Commissions Paid (on the downside when the underlying touches zero - $41 in this case)


What is the maximum loss for Put Ratio BackSpread Options
The loss region in case of Put Ratio BackSpread Options position is limited to the inverted pyramid shape as indicated by the BROWN colored graph around $45 area. Since it is pyramid shape, it means the loss will change linearly as the underlying stock price moves.

Maximum Loss of Put Ratio BackSpread Options = Difference in strike price - Net Options Premium Received - Brokerage & Commissions Paid

= $10 - $6 - Brokerage & Commissions Paid
= $4 - Brokerage & Commissions Paid

Let's now see the risks and Entry signals and exist signals for Put Ratio BackSpread Options in the next article