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Ratio Put Spread




The Ratio Put Spread is the opposite of a Put Ratio Backspread in that we are net short options. This means we are exposed to uncapped risk and can only make a limited reward. As such, this is an undesirable strategy, and you’d be better off trading one of the long butterflies.


The Ratio Put Spread involves buying and selling different numbers of the same expiration puts. Typically we sell and buy puts in a ratio of 2:1 or 3:2, so we are always a net seller. This gives us the uncapped risk potential. It also reduces the net cost of doing the deal such that we create a net credit.


Market Opinion


Neutral to bullish.


P/L Profile


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When To Use


This is an income strategy. You are looking for a net credit if the stock stays within a range or rises.




XXXX is trading at $27.65 on May 10, 2011.

Sell two June 2011 25 strike puts at $0.42.

Buy one June 2011 $27.50 strike put at $1.33.




This position will be profitable if the stock stays within a range.


Risk vs. Reward


There is unlimited risk in this position, with capped reward.


Net Upside


The difference between the strike prices plus the net credit.


Net Downside


Unlimited downside.


Break Even Point


Break even up: Higher strike price minus net debit times the number of long contracts.


Break even down: Higher strike price minus the difference in strike prices, times the number of short contracts, divided by the number of short contracts less long contracts, minus the net credit received (or plus net debit paid).


Effect Of Volatility


Increasing volatility is harmful to this strategy because of our exposure to

uncapped risk. The best thing that can happen is that the stock doesn’t move at all.


Effect Of Time Decay


Positive. You are selling more contracts than buying, and want to be exposed only one month or less.


Alternatives Before Expiration


To stem a loss, if the stock drops under the stop loss, close out the position. You can also buy back the short puts. This kind of trade is best closed out one month before expiration to stem losses and capture profit.


Alternatives After Expiration


Close out the position by selling the puts bought, and by buying back the puts sold.




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