Put Ratio Spread Explained | Online Option Trading Guide Page 1 of 4

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Neutral Strategies

Overview
Put Ratio Spread
Butterfly Spread
The put ratio spread is a neutral strategy in options trading
Calendar Straddle
that involves buying a number of put options and selling
Condor more put options of the same underlying stock and
Iron Butterfly expiration date at a different strike price. It is a limited
Iron Condor profit, unlimited risk options trading strategy that is taken
Long Put Butterfly when the options trader thinks that the underlying stock
Long Straddle will experience little volatility in the near term.
Long Strangle
Neutral Calendar Put Ratio Spread Construction
Spread
Buy 1 ITM Put
Put Ratio Spread
Sell 2 OTM Puts
Ratio Call Write
A 2:1 put ratio spread can be implemented by buying a
Ratio Put Write
number of puts at a higher strike and selling twice the
Ratio Spread
number of puts at a lower strike.
Short Butterfly
Short Condor
Short Put Butterfly Limited Profit Potential
Short Straddle
Short Strangle Maximum gain for the put ratio spread is limited and is made when the underlying stock price at expiration is at the
Variable Ratio Write strike price of the options sold. At this price, both the written puts expire worthless while the long put expires in the
Reverse Iron Condor money. Maximum profit is then equal to the intrinsic value of the long put plus or minus any credit or debit taken
Reverse Iron Butterfly when putting on the spread.
Long Guts
Short Guts The formula for calculating maximum profit is given below:

Long Call Ladder

Short Call Ladder • Max Profit = Strike Price of Long Put - Strike Price of Short Put + Net Premium Received -
Long Put Ladder Commissions Paid
Short Put Ladder
• Max Profit Achieved When Price of Underlying = Strike Price of Short Put
Strip
Strap

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Put Ratio Spread Explained | Online Option Trading Guide Page 2 of 4

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Put Ratio Spread Payoff Diagram

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Any risk to the upside for the put ratio spread is limited to the debit taken to put on the spread (if any). There may
even be a profit if a credit is received when putting on the spread.
Pay Only 4
Positive Tips The formula for calculating loss is given below:
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• Loss Occurs When Price of Underlying < Strike Price of Short Puts - ((Strike Price of Long Put - Strike
Price of Short Put + Net Premium Received) / Number of Uncovered Puts)

• Loss = Strike Price of Short - Price of Underlying - Max Profit + Commissions Paid

Breakeven Point(s)
There are 2 break-even points for the put ratio spread position. The breakeven points can be calculated using the
following formulae.

• Upper Breakeven Point = Strike Price of Long Put +/- Net Premium Received or Paid

• Lower Breakeven Point = Strike Price of Short Puts - (Points of Maximum Profit / Number of
Uncovered Puts)

Example
Suppose XYZ stock is trading at $48 in June. An options trader executes a 2:1 ratio put spread strategy by buying a
JUL 50 put for $400 and selling two JUL 45 puts for $200 each. The net debit/credit taken to enter the trade is zero.

On expiration in July, if XYZ stock is trading at $45, both the JUL 45 puts expire worthless while the long JUL 50 put
expires in the money with $500 in intrinsic value. Selling or exercising this long put will give the options trader his
maximum profit of $500.

If XYZ stock price drops and is trading at $40 on expiration in July, all the options will expire in the money but
because the trader has written more puts than he has purchased, he will need to buy back the written puts which
have increased in value. Each JUL 45 put written is now worth $500. However, his long JUL 50 put is worth $1000
and is just enough to offset the losses from the written puts. Therefore, he achieves breakeven at $40.

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Put Ratio Spread Explained | Online Option Trading Guide Page 3 of 4

Below $40, there will be no limit to the maximum possible loss. For example, at $30, each of the two written JUL 45
puts will be worth $1500 while his single long JUL 50 put is only worth $2000, resulting in a loss of $1000.

However, there is no upside risk to this trade. If the stock price had rallied to $50 or higher at expiration, all the
options involved will expire worthless. Since the net debit to put on this trade is zero, there is no resulting loss.

Note: While we have covered the use of this strategy with reference to stock options, the put ratio spread is equally
applicable using ETF options, index options as well as options on futures.

Commissions
For ease of understanding, the calculations depicted in the above examples did not take into account commission
charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade
options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each
trade should check out OptionsHouse.com as they offer a low fee of only $0.15 per contract (+$8.95 per trade).

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Similar Strategies
The following strategies are similar to the put ratio spread in that they are also low volatility strategies that have
limited profit potential and unlimited risk.

Variable Ratio Write Short Strangle (Sell Strangle) Short Straddle (Sell Straddle)

View More Similar Strategies

Ratio Put Backspread

The converse strategy to the put ratio spread is the ratio put backspread. Ratio put backspreads are used when
large movements is expected of the underlying stock price.

Call Ratio Spread

The ratio spread can also be constructed using calls. The call ratio spread is similar to the put ratio spread strategy
but has a slightly more bearish and less bullish risk profile.

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Put Ratio Spread Explained | Online Option Trading Guide Page 4 of 4

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