The Ratio Put is a bearish option strategy with a possibility of good percentage gains to the downside and limited loss to the upside.


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Strategy: Ratio Put

a.k.a. Ratio Put Spread

Ratio Put Option Graph

The Outlook: Bearish. The position will gain if the stock falls by at least the amount of the initial debit. But, not too bearish, since the position can lose on too much of a move.

The Trade: Buy an ATM put, sell two OTM puts.

Gains when: Stock falls but not too far.

Maximum Gain: Limited to the difference in strike prices less the initial debit.

Loses when: Stock does not fall or falls too much.

Maximum Loss : Unlimited.

Breakeven Calculation: Upper breakeven: long strike - initial debit. Lower breakeven: short strike - difference in strike prices + initial debit.

Advantages compared to short stock: Leverage, limited loss to upside.

Disadvantages compared to short stock: Loss if stock falls too far.

Volatility: after entry, increasing implied volatility is negative.

Time: after entry, the passage of time is positive.

Margin Requirement : Your broker will see this trade as a bear put and naked short puts. The bear put requires no margin, but the naked short puts will require a minimum of 10% of the strike price plus the premium received, and probably more.

Variations: The short strike can be anywhere you wish, with the long strike above that. Wherever you put the short strike, that is where the "sweet spot" will be.


  • This strategy might be used if you thought there was a good chance of the stock falling to the short strike before expiration, but not further.
  • The intent of this trade is to be bearish by owning a long put, but help pay for the put by selling two puts at a lower strike.
  • It is possible to enter this strategy for a credit when the implied volatility is high. If you enter for a credit, there is no risk to the upside, and the strategy will benefit from any drop in the implied volatility. However, the implied volatility being high may be a sign the market thinks the stock might have a good move lower, which would cause a loss for the position.
  • Before using this strategy, consider adding an inexpensive long put at a lower strike. That turns the trade into a Butterfly. The Butterfly will maintain about the same risk and reward over the bearish price move you expect, without the unlimited risk if the stock falls too much.
  • Also compare this strategy to a Bear Put, ATM. The entry debit will be higher, but if the stock falls more than you think it will, you can keep the gains instead of giving them all back or having a loss.


  • This is a psychologically difficult trade. If the stock moves lower as you expect and reaches the short strike before expiration, you may not know what to do. If you hold on and the stock stays where it is, your gains will increase quite a bit just by the passage of time. But if the stock moves higher or lower, you start giving back the gains. The best course of action might be to exit the trade if the stock reaches the short strike price, whenever that is.
  • If the stock rises instead of falling, you might try to take about half the maximum loss whenever that happens.


  • If the stock falls near the short strike, it is possible to stick with the trade by shorting enough stock to cover half the short puts. Then there is no further risk of loss to the downside, and you may be able to keep the entire gain as if you had entered a bear put. However, you would then have a lot of short stock risk and would lose if the stock reversed to the upside.

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