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Last updated: 09/01/2024, 9:15AM

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Ratio Analysis

Watch here, How to use Ratio Analysis?

What is Ratio Analysis?

In options trading, ratio analysis involves analyzing the relationship between different options contracts, such as calls and puts, to determine their risk-reward profile and potential profitability. Traders use ratios to assess the impact of market movements on their positions and make informed trading decisions.

Interpretation of Ratio Analysis

On the TalkOptions website, the Ratio Analysis tool is beneficial for options traders to determine the Premium difference and per share credit details. Traders can select the underlying stock or index from the dropdown menu, along with the expiry date and option type. They can also choose the strike price for the buy leg and set the buying and selling ratio.
For instance, if a trader believes Nifty will rise to 19600 but wants to protect their capital, they can implement a hedging strategy. They can buy 1 lot of 19500 CE at 120 and simultaneously sell 1 lot of 19600 CE at 54. By doing so, their risk reduces from 120 rupees to only 47 rupees.
In the worst-case scenario, if the market goes down, the trader will lose 120 rupees from 19500 CE but gain 55 rupees from the 19600 CE they sold, resulting in a net loss of only 47 rupees. However, if the trader had taken only the 19500 CE option without hedging, they would have incurred a loss of the full 120 rupees.
The Ratio Analysis tool allows traders to analyse and optimize their options trading strategies, minimizing risk and maximizing potential profits. By using this tool, traders can make well-informed decisions and protect their capital more effectively. Traders can select the Scrip Name in the Drop Down Menu. For example, a trader wants to strategize in the Nifty Index so he can click on Nifty. Then traders can select the Expiry date. If traders want to trade in the September Monthly Series then they can click on the 28th Sep 2023 Expiry Date. They can select the Option type in which they want to work. If they assume that the market can go up then they can choose Call Option from the drop-down box.
In Ratio Analysis, there are 2 legs in which traders can work
Buying leg and other is Selling Leg
Traders can select the Buying Leg Strike Price For instance, the Nifty spot is running at 19200 levels
So traders can select the ATM Strike of 19200 Now traders will get the Option of Leg 1 and Leg 2 difference
Traders need to fill the box in multiples of the strike gap of the selected Scrip.
In our example, we selected Nifty and its strike gap is 50 So we can select 50, 100, 150…. Like this
If we select 100 as a leg difference
So system will automatically sell the 19300 strike price
Because we selected 19200 as the 1st leg (Buying Strike)
And 100 points difference means the 19300 strike price will be our 2nd leg (Selling Strike)
Now traders can select the Buy Ratio and Sell Ratio figures.
If we select 1:2 it means 1 lot buying and 2 lots selling
If we select 1:3 it means 1 lot buying and 3 lots selling
So, here if we select Buy Ratio as 1 and Sell Ratio as 3 then the system will fetch the data as 1 lot buying of 19200 CE and 3 lots selling of 19300 CE (because we selected 100 points difference)
So in our example, we bought 1 lot of 19200 CE strike at the LTP of 678.65 Where we paying = 33932.5
And we are selling 3 lots of 19300 CE strike at the LTP of 579.65
Where we are getting a premium of = 86947.5
So Net credit = Options premium received - Option premiums paid
Net Credit = 86947.5 - 33932.5
Net Credit will be = 53015
If Nifty expires at 19300 levels or below that then we will earn full net credit.