Put Ratio Spread
Buy one put and sell two lower puts. A neutral-to-bearish strategy that profits from moderate declines but has risk below the short strikes.
We're recording short 2-3 minute video explainers for every lesson. The full written guide is ready below. Bookmark this page — the video will appear right here when it's ready.
What is a Put Ratio Spread?
A put ratio spread involves buying one put at a higher strike and selling two puts at a lower strike, all at the same expiration. Like the call ratio spread, this creates an unbalanced position with a bear put spread embedded plus an extra naked short put.
The trade profits when the stock drops moderately to the short strike. If the stock crashes well below the short strike, the extra naked put creates large losses. The trade is often entered for a small credit, making it essentially free if the stock stays flat or goes up.
How to Set It Up
- Buy 1 put at a higher strike
- Sell 2 puts at a lower strike
- Same expiration for all legs
- Strike selection: Buy the ATM or slightly OTM put. Sell two puts 5-10 points lower.
- Credit or debit: Often entered for a small credit, especially in high-IV environments.
The 1:2 ratio is standard. The extra short put funds the long put but creates the downside risk.
When to Use This Strategy
Use a put ratio spread when:
- You are moderately bearish and expect the stock to drop to a support level but not crash
- You want a low-cost entry to a bearish position
- You are comfortable with significant downside risk below a certain level
- IV is elevated, making put premiums attractive for selling
- You have a clear support level where you expect the stock to hold
Avoid this strategy if there is any chance of a major crash — earnings disappointment, macroeconomic shock, or any catalyst that could cause the stock to gap down sharply.
Example Trade
Stock XYZ is trading at $100. You expect a pullback to $95 but not a crash.
- Buy 1 XYZ $100 put for $3.50
- Sell 2 XYZ $95 puts for $1.80 each ($3.60 total)
- Net credit: $3.60 - $3.50 = $0.10 ($10 collected)
If XYZ stays at $100 or goes up: All puts expire worthless. You keep the $10 credit.
If XYZ drops to $95: The $100 put is worth $5. Both $95 puts expire worthless. Profit: $500 + $10 = $510. Maximum profit.
If XYZ drops to $90: The $100 put is worth $10. Both $95 puts are worth $5 each ($10 total). Net: $10 - $10 + $0.10 = $10 profit. You are at the lower breakeven.
If XYZ drops to $80: The $100 put is worth $20. Both $95 puts are worth $15 each ($30 total). Net: $20 - $30 + $0.10 = -$990 loss. Losses grow rapidly below here.
Risk and Reward
- Max profit: (Long strike - short strike + net credit) x 100. $510 in our example. Achieved at the short strike.
- Max loss: Substantial on the downside. If the stock drops to zero, the loss is (short strike - max profit per share) x 100. Not technically unlimited (stock cannot go below zero), but can be very large.
- Breakeven: Two points. On the upside, the long strike minus any debit (or you profit from any credit). On the downside, the short strike minus the max profit per share ($95 - $5.10 = $89.90).
Tips and Common Mistakes
- Never hold through earnings or major catalysts. A big gap down is the worst-case scenario.
- Set a hard stop on the downside. Close the trade if the stock breaks below the short strike.
- Consider converting to a butterfly by buying an additional put below the shorts to cap risk.
- Works best on stocks with strong support levels where you believe the floor will hold.
Related Strategies
- Put Backspread — the opposite ratio (sell 1, buy 2) for unlimited downside profit
- Bear Put Spread — the defined-risk component embedded in this trade
- Long Put Butterfly — add a third long put to cap downside risk
Want to learn how to trade this strategy step by step?
Browse Courses All Strategies Profit Calculator