Put Ratio Spread Explained
30 May 2017
Nilesh Jain
New Page 1
What is Put Ratio Spread?
The Put Ratio Spread is a premium neutral strategy that involves buying options at
higher strike and selling more options at lower strike of the same underlying stock.
When to initiate the Put Ratio Spread
The Put Ratio Spread is used when an option trader thinks that the underlying asset
will fall moderately in the near term only up to the sold strike. This strategy is
basically used to reduce the upfront costs of premium and in some cases upfront credit can
also be received.
How to construct the Put Ratio Spread?
 Buy 1 ITM/ATM Put
 Sell 2 OTM Put
The Put Ratio Spread is implemented by buying one IntheMoney (ITM) or AttheMoney
(ATM) put option and simultaneously selling two OuttheMoney (OTM) put options of the
same underlying asset with the same expiry. Strike price can be customized as per the
convenience of the trader.
Strategy 
Put Ratio Spread 
Market Outlook 
Moderately bearish with less volatility 
Upper Breakeven 
Long put strike (/+) Net premium paid or received 
Lower Breakeven 
Short put strike  Difference between Long and Short strikes (/+) premium
received or paid 
Risk 
Unlimited 
Reward 
Limited (when underlying price = strike price of short put) 
Margin required 
Yes 
Let’s try to understand with an Example:
NIFTY Current market Price Rs 
9300 
Buy ATM Put (Strike Price) Rs 
9300 
Premium Paid (per share) Rs 
140 
Sell OTM Put (Strike Price) Rs 
9200 
Premium Received Rs 
70 
Net Premium Paid/Received Rs 
0 
Upper BEP 
9300 
Lower BEP 
9100 
Lot Size 
75 
Suppose Nifty is trading at Rs 9300. If Mr. A believes that price will fall to 9200 on
expiry, then he can initiate Put Ratio Spread by buying one lot of 9300 put strike price at Rs 140 and simultaneously selling two lot of
9200 put strike price at Rs 70. The net premium paid/received to initiate this trade is
zero. Maximum profit from the above example would be Rs 7500 (100*75). It would only occur
when the underlying asset expires at 9200. In this case, short put options strike will
expire worthless and 9300 strike will have some intrinsic value in it. However, maximum
loss would be unlimited if it breaches breakeven point on downside.
For the ease of understanding, we did not take in to account commission charges.
Following is the payoff schedule assuming different scenarios of expiry.
The Payoff Schedule:
On Expiry NIFTY closes at

Net Payoff from 9300 Put Bought (Rs)

Net Payoff from 9200 Put Sold (Rs) (2Lots)

Net Payoff (Rs)

8700

460

860

400

8800

360

660

300

8900

260

460

200

9000

160

260

100

9100

60

60

0

9150

10

40

50

9200

40

140

100

9250

90

140

50

9300

140

140

0

9350

140

140

0

9400

140

140

0

9450

140

140

0

9500

140

140

0

The Payoff Graph:
Impact of Options Greeks:
Delta: If the net premium is received from the Put Ratio Spread, then the Delta
would be positive, which means any upside movement will result into marginal profit and
any major downside movement will result into huge loss.
If the net premium is paid, then the Delta would be negative, which means any upside
movement will result into premium loss, whereas a big downside movement is required to
incur huge loss.
Vega: The Put Ratio Spread has a negative Vega. An increase in implied volatility
will have a negative impact.
Theta: With the passage of time, Theta will have a positive impact on the strategy
because option premium will erode as the expiration dates draws nearer.
Gamma: The Put Ratio Spread has short Gamma position, which means any major
downside movement will affect the profitability of the strategy.
How to manage Risk?
The Put Ratio Spread is exposed to unlimited risk if underlying asset breaks lower
breakeven hence one should follow strict stop loss to limit losses.
Analysis of Put Ratio Spread:
The Put Ratio Spread is best to use when investor is moderately bearish because
investor will make maximum profit only when stock price expires at lower (sold) strike.
Although your profits will be none to limited if price rises higher.