A short put ratio strategy with a 1x3 setup is built by purchasing one higher-strike put option and selling three lower-strike put options on the same underlying stock and expiration. By selling two additional options for every one option bought, you collect a sizable net credit upfront. Traders use this setup when they expect the stock to remain steady or dip slightly toward the lower strike price by expiration.
Your peak profit occurs if the stock closes exactly at the lower strike price when the options expire, giving you the maximum spread payout plus your net credit. The tradeoff for the larger upfront credit is increased downside risk, as two short puts remain completely exposed. If the stock undergoes a severe drop toward zero, you face heavy financial losses from being forced to buy stock well above market value.
- Buy one $100 Put for $4.50
- Sell three $95 Puts for $2.50 each
- Stock at $95: +$800 Max Profit
- Stock ≥ $100: +$300 Credit Kept
- Stock < $91: Substantial Loss Potential (e.g., -$1,200 at $85)