Long Ratio Put Spread: Asymmetric Downside Exposure With More Long Puts

A long ratio put spread is an asymmetric put strategy with more long puts than short puts. In the Options Industry Council's standard 1-by-2 construction, the investor sells one higher-strike put and buys two lower-strike puts with the same expiration.

The position is designed to benefit from a sufficiently large decline in the underlying or, before expiration, from favorable changes in implied volatility.

Standard 1-by-2 structure

A common construction is:

• short 1 higher-strike put; and
• long 2 lower-strike puts;

with the same expiration.

The trade may open for a debit or a credit depending on the selected strikes and option prices.

Maximum loss is near the lower strike

At expiration, the unfavorable region is around the lower strike. There, the short higher-strike put has intrinsic value while the two lower-strike puts have little or none.

For the standard 1-by-2 structure, maximum loss is generally the strike difference plus any debit paid, or reduced by any credit received.

Below the lower strike, the two long puts increasingly offset the single short put. Unlike a call's upside, however, a stock price cannot fall below zero, so the strategy's maximum gain is substantial but finite.

Ratio terminology can be confusing

A position with more long options than short options is often described as a backspread, but ratio-spread naming is not perfectly uniform across market participants.

The exact legs are therefore more important than the nickname. “Short one higher-strike put, long two lower-strike puts” identifies the exposure more reliably than “put ratio spread” alone.

Volatility and time decay

Because the standard position owns more puts than it sells, rising implied volatility will often help it, all else equal. Time decay will often hurt it.

These sensitivities vary with moneyness, skew, remaining time, and the underlying price. The expiration payoff does not describe every mark-to-market path before expiration.

Not the same as a bear put spread

A standard Bear Spread normally uses matched quantities and has a capped maximum gain. The long ratio put spread owns an extra lower-strike put, changing both the tail payoff and volatility sensitivity.

Investor interpretation

Specify the contract ratio, strikes, expiration, debit or credit, and which side owns the extra options. Do not describe the downside gain as unlimited; the underlying stock's zero lower bound makes the maximum expiration gain finite.

Sources

• Options Industry Council, Long Ratio Put Spread
• Options Industry Council, Options Glossary: Backspread

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