Put Ratio Spread Strategy

The Put Ratio Spread is an advanced options strategy that involves buying a certain number of put options at a higher strike price and selling a greater number of puts at a lower strike price — typically in a 1:2 ratio. This setup allows traders to benefit from limited downside movement, time decay, and elevated implied volatility. It’s best suited for neutral to slightly bearish market conditions.

Structure

• Buy 1 in-the-money or at-the-money put
• Sell 2 out-of-the-money puts (same expiration)
• All options share the same expiration date

Profit & Loss Profile

• Max Profit: Occurs if the stock closes at the short put strike at expiration
• Max Loss: Unlimited if the stock drops significantly below the short strike
• Breakeven: Depends on net credit/debit and strike width
• Entry: Can be for a net credit or debit depending on option pricing

Ideal Market Conditions

• Neutral to slightly bearish outlook
• Expecting low volatility or range-bound movement
• Best when implied volatility is high at entry and expected to decline

Example

A stock is trading at $50. You:

• Buy 1 put at $50 strike for $3
• Sell 2 puts at $45 strike for $2 each

Net credit = $1. Max profit occurs if the stock closes at $45. If it drops below $45, losses begin due to the uncovered short put.

Risks & Considerations

• Unlimited downside risk if the stock falls far below short strike
• Requires active monitoring and potential adjustments
• Assignment risk on short puts
• Time decay and volatility shifts impact profitability