I was away for lunch and just came back. Thank you very much for putting together such an incredibly detailed explanation to me. Appreciate it a lot! Would you tell me why your breakeven for the ratio put spread is 275 instead of 290-(5+2.5)=282.5. I thought each of the two puts has to share the credit and the spread if assigned.
I guess the main reason I asked the topic question is how to obtain the stocks at a lower cost instead of pretecting any existing shares. That is why I only look at the breakeven point for the options, not the stocks. Either you protect the stocks or buying the stock at a lower cost when assigned the shares. You cannot have both.
If hedging the stocks is in the thinking process, you are right. It protects the stock for 12.5, but in reality the premium to be paid on the long put is so much higher than the spread, you ended up actually not protecting as much as just selling the put with the premium.
For the real case I looked at today, the promium is almost doubling the spread for APP. For example for APP 465-480 case, 465 put premium is 20.8, 480 put premium is 27.7, you receive 13.9 credit. If stock drops to 465, the breakeven point of the option is 465-(15+13.9)=436.1 using your calculation (Howver I use 465-(15/2+13.9/2)=450.55 for each put to be assigned). But if you sell put option only, the breakeven point is 444.2 (480-20.8), which is lower than the cost of 450.55 to buy the stocks for the put ratio spread. My point is the premium paid is much more than the spread, which makes the trade not worthwhile. If protecting the shares is in consideration, if the stock drops to 465, you still only have $21.95 (15+13.9/2) to hedge against the shares, but if you sell put options you have $27.7 to hedge against the shares.
Please do not hesitate to point out where I am wrong in the thinking. Thanks a lot!
