Snapshot
Legs
Sell 1 Higher-Strike Put + Buy 2 Lower-Strike Puts
Outlook
Strongly Bearish
Max profit
Lower strike price minus width between strikes plus net credit (Substantial)
Max Loss
Difference between strike prices minus net credit (or plus net debit)
A put ratio backspread strategy is constructed by selling one higher-strike put option and buying two lower-strike put options on the same stock and expiration date. Traders put this on when options are cheap, and at those prices the one short put more than pays for both long puts, so the trade opens for a net credit. Investors use this strategy when they anticipate a major market sell-off.
Profit potential is substantial as the stock drops toward zero because the two long puts gain value faster than the single short put loses value. The maximum loss takes place if the stock closes right at the lower strike price at expiration, while a rally in the stock lets you keep any upfront net credit.
Example
Stock
$100
Trade
- Sell one $100 Put for $3.00
- Buy two $95 Puts for $1.25 each
→ $0.50 credit ($50)
Breakevens
$90.50 / $99.50
Outcomes
- Stock at $95: -$450 Max Loss
- Stock ≥ $100: +$50 Credit Kept
- Stock < $90.50: Substantial Profit Potential (e.g., +$550 at $85)