Ratio Put Spread

What is a ratio put spread?

A ratio put spread trades an unequal number of puts at two strikes of the same expiration. Like its call cousin, the name covers two opposite positions:

• Ratio put spread (front spread, 1x2): buy one put at the higher strike B and sell two puts at a lower strike A. The second short put pays for most or all of the put bought. It gains most if the stock falls to A, but one of the two short puts is uncovered: below the lower breakeven the loss grows as the stock falls, all the way to zero.
• Put backspread (ratio backspread): sell one put at B and buy two puts at A. It is the mirror image: a bet on a sharp drop, with the worst result at A.

How the two versions pay off

Ratio put spread: buy 1, sell 2

• Above B. All the puts expire worthless: you lose the debit or keep the credit.
• From B down to A. The put you bought gains $1 a share for each $1 the stock falls; the puts you sold are still worthless. The gain peaks at A.
• Below A. One short put is offset by the put you own; the other is not, so the position loses $1 a share for each further $1 drop. A stock can only fall to zero, so the loss is capped, but it can be many times the premium involved.
• Margin and assignment. Brokers treat the extra put as a naked short put and require margin or cash for it. Short puts can be assigned early when deep in the money, leaving you with 100 shares per contract bought at A.

Put backspread: sell 1, buy 2

• Above B. Everything expires worthless: you keep the credit or lose the debit.
• From B down to A. The put you sold loses $1 a share for each $1 drop while the two puts bought are still worthless. The loss is largest at A.
• Below A. The two puts bought gain $2 for each $1 drop against the short put's $1, so the position gains $1 a share per $1 fall, up to its maximum if the stock goes to zero.
• Risk. The short put is covered by the puts bought, so the loss is capped at the amount in the table.

Which one our tools mean

Our Option Strategy Benchmarks' Ratio Put Spread index is the backspread: sell one at-the-money put and buy two puts 5% below the stock price, at 30, 60, 90 and 120 days. On the Multi-Leg Trade Screener, Ratio Put Spread is a structure label, such as Ratio Put Spread 1 by 2: one put at the higher strike and two at the lower, with the lower strike marked [2x] in the Legs column. The same label covers a trader who bought the one put and sold the two and a trader who did the reverse.

The put backspread our Strategy Benchmarks track, drawn for zero net cost. In this diagram strike A is the one put sold (at the money) and strike B the two puts bought (lower).

What you can find out

Where to find it

• Multi-Leg Trade Screener (Screeners › For Premium Users › Multi-Leg Trades): ratio put spreads of 200 contracts or more traded on the report date, under Ratio Put Spread in Spread Type. Ratio spreads across two expirations are listed separately as Calendar Put Ratio Spread and Put Diagonal Ratio Spread.
• Option Strategy Benchmarks › Ratio Put Spread, on a stock's pages: what the backspread costs now at 30, 60, 90 and 120 days, its change, its 52-week average and where today's cost ranks in the past year, marked Debit or Credit.
• Strategy Payout, on a stock's pages: draw either version at expiration by setting a Ratio for each leg, for example a Long Put with ratio 1 and a Short Put with ratio 2. For example /Overview/SPY/StrategyPayout/.
• The Options Backtester doesn't test ratio spreads.

Worked example

The stock is at $100, with 30 days to expiration. The $100 put costs $3.25 and the $95 put $1.35. The ratio put spread buys one $100 put and sells two $95 puts: $3.25 − $2.70 = a $0.55 debit. The put backspread does the opposite for a $0.55 credit. At expiration:

Both break even at $99.45 and $90.55. The ratio spread's best case is $445 per spread at $95; the backspread's worst case is the same amount at the same price.

Option prices estimated with Black-Scholes at 30% implied volatility and a 4% interest rate, rounded. An illustration of the math, not a trade idea. Commissions, fees, margin and early assignment are left out.

FAQ

What is a 1:2 put spread?

Another name for the ratio put spread: buy one put and sell two puts at a lower strike, in the same expiration.

What is the most a 1x2 put spread can lose?

If the stock goes to zero: twice the lower strike minus the higher strike, plus any debit or minus any credit, per share. With $100 and $95 strikes and a $0.55 debit, that is $90.55 a share, or $9,055 per spread.

Why sell an at-the-money put in a backspread?

The at-the-money put brings in the most premium, which pays for the two cheaper puts bought below it. The price is a loss if the stock slides only to the lower strike by expiration.

Can the short puts be assigned early?

Yes, for American-style options such as most US stock and ETF options, most often when deep in the money. Each assigned put means buying 100 shares at its strike.