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What is a ratio put spread?

What is a ratio put spread?

A ratio put spread uses multiple put contracts in a certain ratio that makes them start off delta-neutral.

Ratio put spreads are similar to regular spreads, but instead of using the same number of put contracts sold short as are held long, ratio spreads are set up with more of one than the other, in a ratio such as 2:1 or 3:2. The short contracts will have different strike prices than the long contracts.

The contracts which are further out of the money will be cheaper to buy, and it could be that there is no net credit or debit collected by the investor creating the spread position. It may already be priced in so that it works out this way, but the ideal way to set up a ratio spread is in a delta-neutral way.

Depending on which side you are long-- the near-the-money or the further-out contract-- you will have different outlooks for the potential profit and loss of your strategy.

Keywords: portfolio management, options, potential loss, potential profit,
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