Options Strategy Guide
Put Ratio Spread
Profit from a modest decline — careful if the stock crashes hard.
Advanced
Mildly Bearish
Defined upside loss, significant downside loss if stock collapses
The Simple Version
Plain English — no jargon
Mirror image of the call ratio spread. You think a stock will fall a little — but not crash. You buy one put and sell two puts at a lower strike. If it falls modestly, you profit. If it collapses completely, the two puts you sold create big losses.
How It Works — Step by Step
- 1 Buy 1 put at a higher strike
- 2 Sell 2 puts at a lower strike
- 3 Often structured for zero or small net credit
- 4 Maximum profit at the short strike at expiration
- 5 Loss develops below the short strikes if stock collapses
Real Example
META
Illustrative example — not a recommendation
Stock Price
$500.0
Strike Price
$490.0
Premium Collected
$0.4/share
Days to Expiration
30d
Max Profit
$1040
Breakeven
$489.6
Annualized Return
0%
When to Use It — and When Not To
✓ Use when
- You expect a modest, limited decline — not a crash
- IV is high and you want to sell extra downside premium
- You can handle the risk of a sharp drop
✗ Avoid when
- You fear a major crash — extra short put creates large losses
- You don't have margin approval
- Stock is prone to gap-down events
Greeks & Mechanics (for the experienced trader)
Delta
Slightly negative at initiation — becomes more negative if stock crashes.
Theta
Positive — two short puts decay faster than one long put.
Vega
Negative — net short vega.
Gamma
Positive above short strikes, negative below.
Key Risks
- Large losses if stock collapses below the short strikes
- Requires margin and advanced options approval
- Tail risk — a black swan event can cause catastrophic losses
Related Strategies
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