SHORT RATIO PUT SPREAD
Overview
Buy one higher-strike put and sell two lower-strike puts. Often entered for a credit. Profits if the stock declines moderately to the short put strikes. Below the lower breakeven, losses mount as one short put is naked.
What it does
The bearish mirror of the ratio call spread. You buy one protective put and sell two lower-strike puts for a net credit. If the stock declines moderately to the short strike, you collect maximum profit. Below the lower breakeven, one short put is unhedged and losses mount as the stock continues falling. You benefit from a controlled moderate decline, not a crash.
Structure
sell 2 puts + buy 1 put
Setup
- 1.Buy 1 Put at a higher strike.
- 2.Sell 2 Puts at a lower strike.
- 3.Same expiration.
Max profit
(Long Strike − Short Strike + Net Credit) × 100. Achieved when stock closes at the short put strike.
Max loss
Substantial below the lower breakeven — one short put has no protection below it.
Breakeven
Lower breakeven: Short Strike − Max Profit per Share.
When to use
When you're moderately bearish with a specific downside price target and want to trade for a credit or zero cost.
When to avoid
If a crash or severe decline beyond the short put strike is possible.
Example trade
Stock: AAPL at $160 Buy 1 AAPL $160 Put at $4.80 Sell 2 AAPL $150 Puts at $2.50 each (credit $5.00) Net Credit: $0.20 ($20) Expiration: 30 days Max Profit: ($160 - $150 + $0.20) × 100 = $1,020 (if AAPL pins at $150) Max Loss: Substantial below $139.80 Upper Protection: ~$160.20 Lower Breakeven: $150 - $10.20 = $139.80
Common mistakes
- ×Using on stocks with significant crash risk — below the lower breakeven, losses are substantial.
- ×Forgetting one short put is unhedged below the long put strike.
- ×Entering for too small a credit — doesn't justify the downside tail risk.
- ×Not having exit rules defined before entering — requires active management.
- ×Confusing with a put backspread — this wants a moderate decline, not a crash.
FAQ
When is a ratio put spread most useful?
When you expect a specific moderate decline — not a crash. If you're worried about a crash, a simple long put or bear put spread is safer.
How do I convert to defined risk?
Buy a third put below the two short puts — this creates a butterfly with fully defined risk.