Put ratio spread: how it works
The put ratio spread is one of the standard options structures. This page explains its mechanics at expiry, before charges. It is a description for learning, not a suggestion to trade it, and it does not consider your circumstances.
- How it is built
- Buy one put and sell two lower-strike puts.
- Where it gains
- Gains if the underlying falls moderately towards the sold strike.
- Maximum loss
- Large below the lower breakeven because of the extra sold put.
- Maximum profit
- Strike difference plus any net credit.
- Breakeven at expiry
- Depends on the strikes and net premium.
- Risks to watch
- The extra short put carries large downside risk.
Things that change the picture before expiry
- Implied volatility and time decay change option prices every day, so the value before expiry differs from the expiry payoff.
- Brokerage, taxes and slippage apply to every leg when entering and exiting.
- Margin for sold options can rise during the day; a structure with defined risk still needs margin.
- Liquidity and wide spreads on far strikes can make exits costly.
Related reading
Core strategies lesson · Reading a payoff diagram · Risk management · Glossary
Practise it on paper
Load the put ratio spread template in the strategy builder and watch its payoff, Greeks and risk with virtual money.
Create a free account Next: Long call