How does a put ratio spread target moderate downside moves?

Question

AcadiFi · Accepted Answer

A put ratio spread is long fewer puts at a higher strike and short more puts at a lower strike. Example: stock at $70, buy 1 put at 70 for $2.80, sell 2 puts at 65 for $1.10 each. Net credit = -2.80 + 2.20 = -$0.60 (small debit). Max profit at $65: long put worth $5, shorts worthless, less $0.60 debit = $4.40. Below $65, the extra short put creates losses: breakeven around $60.60, unlimited risk to zero. ```mermaid flowchart TB A[Buy 1 Put
70] --> C[Put Ratio 1x2] B[Sell 2 Puts
65] --> C C --> D[Max Profit
at Lower Strike] C --> E[Unlimited Risk
Below Breakeven] ``` Put ratios target expected moderate declines with a floor where the trader is willing to own stock anyway. If assigned at the lower strike, you end up effectively long at that price plus credit received. Hedge funds use put ratios to monetize skew in tech names where far OTM puts trade at inflated vol. During market stress, put ratios can blow up as volatility and skew expand simultaneously—short gamma plus short vega. Position sizing and defined exit triggers are critical. Margin requirements scale with the naked short leg, so capital efficiency is worse than vertical put spreads.

How does a put ratio spread target moderate downside moves?

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