Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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Long Put Ratio Spread

Risk: limited
Reward: limited but very big

General Description
Entering a long put ratio spread entails selling a higher strike put and buying twice as many lower strike puts (same expiration month). It's the same as a put backspread except the ratio of long puts to short puts is locked at 2:1.

(draw a long put ratio spread risk diagram here)

The Thinking
You're bearish and believe the underlying stock has big downside potential. But instead of using a long put strategy, which has high cost of entry, you use a long put ratio spread, which has a much lower initial cost (possibly a net credit) but still has unlimited profit potential. Essentially you are using the proceeds from the short put leg to pay for the long put leg. If you're wrong and the stock drops, you won't lose much, if anything, because as an added bonus, depending on how the trade is constructed, you may be able to initiate the trade for a net credit.

XYZ is at $62.00, and you’re so confident the stock has big downside potential – so big you are willing to roll the dice with out-of-the-money puts – but you’d like to lessen the loss incurred should the stock drop. You buy (2) 60 puts for $3.00 each and sell (1) 65 put for 6.00. The trade is initiated for no cost or credit (other than commissions).

Above $65, all puts expire worthless, and you won’t make or lose money on the trade.

At $60, your max loss occurs. You lose money on the long puts (you bought then for $3.00, now they’re worthless) but make a little in time decay on the short put (you sold it for $6.00, not it’s worth $5.00). So the total loss is $5.00.

Below $60, the profit from one of your long puts will be canceled out by the loss of the short put, but you’ll make money point-for-point via the other long put (once the stock is below breakeven).

Compared to a long put, a long put ratio spread gives you some upside protection, but your downside is reduced, your breakeven level is less favorable and your loss, should the stock not experience a big move, is greater.

The PL chart below graphically shows where this trade will be profitable and at a loss.