Introduction
The Put Ratio Spread is an advanced options trading strategy designed for traders who anticipate a moderate decline in the underlying stock or index while keeping the cost of the trade low. This strategy offers a balance between risk and reward by combining long put options with short put options in a higher ratio.
Put Ratio Spreads work best in low-volatility markets where traders expect a steady downside move without extreme fluctuations. This strategy is often structured as a near-zero-cost or small-credit trade, making it attractive for traders looking to optimize risk-reward dynamics.
In this blog, we will explore how the Put Ratio Spread strategy works, its risk-reward characteristics, and how to execute it efficiently using Algomojo.
What is a Put Ratio Spread?
A Put Ratio Spread consists of:
Buying a smaller number of at-the-money (ATM) or in-the-money (ITM) put options (higher premium paid) Selling a larger number of out-of-the-money (OTM) put options (lower premium collected)
This structure helps reduce the overall cost of the trade and can sometimes generate a net credit, making it a cost-efficient bearish strategy.
Structure of a Put Ratio Spread
The strategy consists of two trades:
Buy 1 ATM or ITM Put Option (Long Leg)
Sell 2 OTM Put Options (Short Legs)
This creates a directional trade that benefits from moderate downward movements while having a defined risk on the upside.
Example of a Put Ratio Spread
Assume Stock XYZ is trading at ₹1000. You execute the following trades:
- Buy 1 ATM Put (Strike Price: ₹1000) at ₹50
- Sell 2 OTM Puts (Strike Price: ₹950) at ₹25 each
Net premium paid: ₹50 – (₹25 × 2) = ₹0 (Zero Cost Trade!)
Possible Outcome Scenarios:
| Stock Price at Expiry | Profit/Loss | Explanation |
|---|---|---|
| ₹1000 (No Move) | Small loss | Time decay affects the long put. |
| ₹950 (Moderate Move) | Maximum Profit | The short puts expire worthless while the long put gains value. |
| ₹900 or Below (Strong Move) | Unlimited Loss | Losses increase as short puts become deep ITM. |
Key Takeaways
Limited Risk – Maximum loss occurs beyond the breakeven point. Limited Profit – Best profit occurs at the sold strike price. Volatility Considerations – Works best in low-volatility environments. Cost-Efficient – Can be structured as a near-zero-cost trade.
Payoff Structure of a Put Ratio Spread
| Scenario | Impact |
| Price remains stagnant |  Small loss due to time decay |
| Price moves down moderately | Maximum profit potential |
| Price drops significantly | Unlimited loss (if unhedged) |
| Volatility increases | Can increase losses |
| Volatility decreases | Beneficial since short options lose value |
Advantages of a Put Ratio Spread
Cost-Effective – Reduces the net premium paid or even generates a small credit.
Limited Risk (Up to Breakeven) – If the stock moves slightly downward, it is a profitable trade.
Works in Low Volatility – Unlike the Put Backspread, this strategy is best suited for low volatility markets.
Customizable Strategy – You can modify the ratio (e.g., 1:3 or 2:3) to fit market conditions.
Risks and Considerations
Unlimited Loss Beyond Breakeven – If the stock price falls too much, the short puts create large losses. Limited Profit Potential – The best profit occurs at the short put strike, after which profits diminish. Margin Requirements – Requires higher margin compared to simple spreads due to uncovered short puts.
Step-by-Step Implementation in Algomojo
With Algomojo, traders can seamlessly execute Put Ratio Spread strategies using automated order placement and execution.
1. Create a Buy ATM Put for Long Leg (Leg 1)
Path: My Strategy → New Strategy
Choose a near-the-money strike price. Select the ATM or ITM put option with the correct expiration. Verify lot size and margin requirements.
2. Create a Sell 2 OTM Puts for Short Leg (Leg 2)
Path: My Strategy → New Strategy
Choose a lower strike price than the long put. Sell 2 OTM put options. Ensure correct lot size and margin allocation.
3. Group the Strategy
Path: My Group Strategy → New Group Strategy
Combine both legs into a single Put Ratio Spread. Name the strategy for easy identification.
4. Enable Paper Trade Mode
Path: My Group Strategy
Test the strategy before deploying it in live markets. Simulate market conditions to observe behavior.
5. Generate a SELL Signal
Path: My Group Strategy
Click SELL to place both orders simultaneously.
6. Executed Paper Trade Orders
Path: My Group Signals → Orders
Verify that both legs are successfully placed in the Order Book. Ensure all contracts are filled at the intended strike and expiration.
7. Monitor Open Positions
Path: My Group Signals → Positions
Track price movements and implied volatility (IV) changes. Monitor the time decay (Theta) effect.
8. Generate a BUY Signal to Exit the Trade
Path: My Group Strategy
Exit the position if the stock reaches the desired profit target. Close the trade before expiration to capture gains.
9. Confirm Closing Orders
Path: My Group Signals → Orders
Ensure both legs are exited at the intended price. Validate the final PnL impact.
10. Review Trade Performance
Path: My Group Signals → Positions
Analyze profit/loss metrics. Optimize future Put Ratio Spread strategies based on insights.
Frequently Asked Questions (FAQ)
How is a Put Ratio Spread different from a Put Backspread? Put Ratio Spread: Limited profit and unlimited risk on downside. Put Backspread: Unlimited profit and limited risk.
What happens if the stock moves sideways? A small loss occurs due to time decay.
Can I execute a Put Ratio Spread with ITM options? Yes, but OTM options provide higher leverage.
Is this strategy suitable for high volatility markets? No, Put Ratio Spreads work best in low volatility environments.
Final Thoughts
The Put Ratio Spread Strategy is an excellent choice for traders looking to capitalize on a moderate bearish move while keeping costs low and risks manageable.
By using Algomojo, traders can efficiently execute, monitor, and refine this strategy with automated multi-leg execution and real-time tracking.
Have you tried a Put Ratio Spread before? Share your experience in the comments! 
