Content
A Front Ratio Put Spread is an options strategy that involves buying one At-the-Money (ATM) put option and selling two Out-of-the-Money (OTM) put options of the same expiry. It is designed to benefit from a neutral to moderately bearish outlook on the underlying asset, and the strategy generates a net credit at the time of initiation.
Since more options are sold than bought, this approach brings in a net premium and allows traders to profit when the underlying price moves slightly lower or stays around the short strike at expiry. However, if the price falls sharply below the breakeven point, the unhedged short put begins to incur losses, making the downside risk unlimited.
This strategy is best suited for experienced traders who can closely monitor positions and adjust if the market turns sharply bearish. Let’s take a look at an example to understand the setup of a front ratio put strategy
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Front Ratio Put Spread Strategy Setup
Let’s assume Nifty is trading at 23,000. Here’s how a Front Ratio Put Spread can be constructed:
| Action |
Option Type |
Strike Price |
Premium Paid / Collected (₹) |
| Buy |
Put Option |
23,000 |
220 (paid) |
| Sell |
Put Option x 2 |
22,800 |
130 x 2 (collected) |
Net Premium Received
Premium received from two short puts = ₹130 × 2 = ₹260
Premium paid for one long put = ₹220
Net Premium = ₹260 − ₹220 = ₹40 (credit)
This ₹40 is received upfront for initiating the trade and represents the maximum gain if Nifty stays just above the ATM strike of 23,000 at expiry.
Profit Scenario
Maximum profit occurs when Nifty closes around the strike of the short puts i.e., 22,800 on expiry. In this case, the 23,000 long put will have an intrinsic value of ₹200 and both 22,800 short puts expire worthless. Hence, maximum profit calculated with the initial premium received is:
Max Profit = (₹200 + ₹40) × 50 = ₹12,000
Now, if Nifty closes above 23,000 all the options expire worthless but the trader keeps the net premium of ₹40.
Profit = ₹40 × 50 = ₹2,000
Breakeven Point
The breakeven point is calculated as:
Breakeven = Short Put Strike − Max Profit per lot = 22,800 − 240 = ₹22,560
This is the point beyond which the strategy begins to lose money.
Loss Scenario
Maximum loss happens when Nifty falls sharply below the breakeven of 22,560. The 23,000 put will only hedge one of the short puts. Hence, the second short put remains uncovered and can incur unlimited loss as Nifty keeps falling.
Max Loss = Unlimited below ₹22,560
The Bottom Line
The Front Ratio Put Spread is an advanced options strategy that allows traders to earn from slight declines or stability in the underlying index. It offers a limited profit potential with a relatively high breakeven buffer due to the net credit received. However, traders should be cautious, as the risk becomes unlimited once the underlying breaks below the breakeven level.
This strategy is ideal when you're mildly bearish but do not expect a major market crash. Due to the risk profile, it’s best used by those who can actively manage their trades or implement adjustments as needed.
