Put Ratio Spread Calculator: 1x2 Payoff and Risk

Put Ratio Spread at a glance

Construction	Buy 1 put at the money and sell 2 puts 2 strikes below the money, all in the front month.
Outlook	Neutral
Volatility view	Wants falling IV
Max profit	Long strike minus short strike, plus the net credit or minus the net debit, times 100.
Max loss	Lower breakeven times 100, reached if the stock falls to zero at expiration.
Breakeven	Lower breakeven equals the short strike minus the strike width, minus the net credit or plus the net debit.
Experience level	Advanced
Also called	Put front spread, 1x2 put ratio spread

How a put ratio spread works

A put ratio spread is a bear put spread with an extra short put added. The first short put offsets part of the long put's cost and the second brings in more premium, so the trade is often opened for a small debit, close to even or a credit. Below the short strike you are net short one put, which means the position acts like a naked short put on a sharp decline. The stock can only fall to zero, so the risk is large but finite.

At expiration, profit climbs from the long strike down to a peak at the short strike, where the long put is worth the full strike width and both short puts expire worthless. Above the long strike, all three puts expire worthless and you keep any credit or lose any debit. Below the short strike, the extra put loses one dollar for each dollar the stock falls, so profit shrinks to the lower breakeven and then becomes a loss that is largest if the stock goes to zero.

Before expiration the position is net short premium, so time decay helps while the stock is between the strikes. Put skew often makes lower strike puts relatively expensive, which improves the price at entry, but implied volatility also tends to jump when stocks fall, and that hurts a position short two puts. A fast decline early in the trade can show a mark to market loss even before the stock reaches the lower breakeven.

Put Ratio Spread example with real numbers

Put Ratio Spread payoff diagram: profit and loss at expiration (solid) and today (dashed) for the example below. Yellow dots mark breakevens.

With the stock at $100, implied volatility at 30%, a 4.1% risk free rate and no dividend, you would buy 1 100 put (32 days) at $3.39, sell 2 95 puts (32 days) at $1.43. That is a net debit of $53. At expiration a maximum profit of $447 and a maximum loss of $9,053, with breakevens at $90.53 and $99.47. The lognormal chance of profit is 34%.

These are theoretical American option prices from the Bjerksund and Stensland model, not live quotes. Load any ticker in the put ratio spread calculator above to run the same math on real market prices.

When to use a put ratio spread

You expect a modest decline to a target price by expiration but not a crash.
Put skew is steep, so the lower strike puts you sell are rich relative to the put you buy.
You want a bearish spread for little or no cost and would accept owning shares at an effective price near the lower breakeven.
You have approval for uncovered puts and the buying power to handle assignment.

Max profit, max loss and breakeven

Maximum profit

Long strike minus short strike, plus the net credit or minus the net debit, times 100. You earn it when the stock closes at the short strike at expiration.

Maximum loss

Lower breakeven times 100, reached if the stock falls to zero at expiration. Written out, that is two times the short strike minus the long strike, minus the net credit or plus the net debit, times 100; on the upside the risk is only the net debit, if any.

Breakeven

Lower breakeven equals the short strike minus the strike width, minus the net credit or plus the net debit. An upper breakeven exists only for a debit trade and equals the long strike minus the net debit; a credit trade has no loss on a rally.

Put Ratio Spread Greeks

Delta: Delta at entry can be slightly negative or slightly positive depending on the strike spacing, and it becomes clearly positive as the stock falls below the short strike, where the extra short put dominates.
Gamma: Gamma is negative because you are short two options against one, and it is most negative near the short strike late in the trade.
Theta: Theta is positive, since two short puts decay faster than one long put.
Vega: Vega is negative, so a volatility spike during a selloff hurts and a calm drift lower helps.

See the live numbers for your position in the Greeks tab of the calculator, or explore a single option in the options Greeks calculator.

Early exercise and assignment risk

The put ratio spread has one uncovered short put, and American puts can be exercised early when they are deep in the money. If the stock falls well below the short strike and those puts have little time value left, holders may exercise to collect the strike price now, which is more attractive when interest rates are higher. Assignment on both short puts means buying 200 shares. Your long put lets you sell 100 of them at the higher strike, but the other 100 shares are an unhedged long stock position.

Because of that, brokers require uncovered put approval and enough buying power or margin to absorb the extra shares. Dividends lower the odds of early put assignment before an ex dividend date, since holders prefer to wait for the price drop. At expiration, pin risk is real: if the stock closes near the short strike, you may be assigned on none, one or both puts. Closing or rolling the short puts before the final day avoids an unexpected stock position.

The calculator's Early exercise risk tab flags short legs that are likely to be assigned. For a single option, use the early exercise calculator or read how early exercise and assignment work.

Pros and cons

Pros

Can be opened for little or no cost, or a credit.
Maximum profit at the short strike is larger than a comparable bear put spread.
Benefits from time decay and from selling relatively rich lower strike puts.
No loss on a rally if opened for a credit.

Cons

Large downside risk below the lower breakeven, limited only by the stock reaching zero.
Requires uncovered put approval and buying power.
Deep in the money short puts can be assigned early, leaving you long extra shares.
Volatility tends to rise in a selloff, which can hurt the position before expiration.

How to manage a put ratio spread

Buy a further out of the money put to cap the downside, converting the trade into a put butterfly or broken wing butterfly.
Take profit if the stock reaches the short strike early rather than waiting for expiration.
Set an adjustment level above the lower breakeven and act if the stock falls through it.
Close or roll short puts that are deep in the money with little time value before assignment becomes likely.

Put Ratio Spread FAQ

Is a put ratio spread bearish?

A put ratio spread is mildly bearish to neutral: it profits most if the stock declines to the short strike at expiration. A sharp drop far below the short strike turns it into a loss because one short put is uncovered. If opened for a credit, it also keeps a small profit if the stock rises.

What is the max loss on a put ratio spread?

The max loss on a put ratio spread equals the lower breakeven times 100, which you would lose if the stock fell to zero. That risk comes from the uncovered short put. On the upside the risk is limited to the net debit, if any.

How is a put ratio spread different from a bear put ladder?

A put ratio spread sells two puts at the same lower strike, while a bear put ladder sells one put at each of two lower strikes. The ladder spreads out the short exposure, which moves the lower breakeven further down but usually lowers the peak profit. Both carry large downside risk below the lowest short strike.

Can a put ratio spread be assigned early?

Yes, the short puts in a put ratio spread can be assigned early if they become deep in the money with little time value. Assignment on both would leave you long 200 shares, only 100 of which your long put can offset. Rolling or closing the short puts before they go deep in the money reduces that risk.

Call Ratio Spread

A call ratio spread buys one call and sells two higher strike calls in the same expiration, and it profits most when the stock rises to the short strike at expiration.

NeutralAdvanced

Put Ratio Backspread

A put ratio backspread sells one put and buys two lower strike puts in the same expiration, and it profits most from a sharp decline in the stock.

BearishAdvanced

Bear Put Ladder

A bear put ladder is a three leg put position that profits when the stock eases down to the middle strike, but carries large downside risk if the stock collapses below the lowest strike.