Zeev's Turnips Patch-No Politics (ZEEV)

[alohamart]

I called it what it is, a Put Ratio Backspread, where you short puts at a higher stike to fund the purchase of puts at a lower strike, in a ratio to get the credit from the higher stike sale to fund most or all of the lower strike purchase. It's a well-known strategy among advanced option players, and one I've used in the past. In this case, the trader uses deep "in the money" strikes to maximize the credit (it would be much smaller if he used e.g., 25 and 35) and to minimize the risk that the lower strike puts would expire worthless. I don't care what you call it, it is what it is.

The risk is not zero, as he loses money on the excess long 45 puts if the QQQ rallies, while gaining on those puts as the QQQ drops.

I don't see how you can know what the intent of the spread is, though lifting one leg is definitely a possibility (an aggressive one, as I mentioned in a previous post). Often these kinds of spreads are put on and taken off as a whole. I would guess that the intent is not to lift the legs one at a time, as the risk of a spread with 8000 net put contracts long is very different from the risk of being naked short over 100,000 puts (as is the margin requirement). If he guesses the bottom wrong and lifts the long put leg too early, he'd lose over $10 million per point the QQQ goes down (vs. closing it all out at once), far more than he's risking in the spread. Just imagine doing this trade from QQQ 100 to QQQ 70, then legging out and being naked short QQQ ITM puts at QQQ 25 -- big time loss, vs. closing it all out at once at QQQ 70 for a sizable profit (remember, the number of puts that "nullify" each other is much larger than the number of puts he's net long, as those "nullifying" puts are used primarily just to fund the purchase of the "excess" puts).

We'll be able to tell in the future by a big change in the OI of those puts if the trade is lifted one leg at a time or lifted all at once. One leg at a time is much more aggressive, would require a lot more margin, and is not as common a way to close out this kind of spread. Time will tell...

Aloha