PUT BACKSPREAD / PUT RATIO SPREAD
When to use:
When you are bearish on market direction and bullish on volatility.
A Put Backspread should be done as a credit. This means that after you buy 2 OTM puts and sell 1 ITM put the net effect should be a credit to you. I.e. you should receive money for this spread as your are short more than you are long. One may experiment with this ratio spread, and may even use 1:3 ratio - but risk:reward ratio should first be ascertained in each case, before initiating a position.
Put Backspread's are a great strategy if you are bullish and bearish at the same time, however, have a bias to the downside. Looking from the payoff, you can see that if the market sells off you make unlimited profits below the break even point. If, however, you are wrong about the direction and the market stages a rally instead, you still win - though your profits are limited.
You might say that this type of strategy is similar to a Long Straddle - and you would be right.
The difference is that
1) the profits are limited on one side, and
2) Backspread's are cheaper to put on.