## What Is Put Ratio Backspread?

A put ratio backspread is an options trading strategy that combines short puts and long puts to create a position whose profit and loss potential depends on the ratio of these puts.

### Key Takeaways

• A put ratio backspread is an options trading strategy that combines short puts and long puts to create a position whose profit and loss potential depends on the ratio of these puts.
• Put ratio spread is constructed to have unlimited potential profit with limited loss, or limited potential profit with the prospect of unlimited loss, depending on how it is structured.
• The ratio of long to short puts in a put ratio backspread is typically 2:1, 3:2 or 3:1.

A put ratio backspread combines short puts and long puts and seeks to profit from the volatility of the underlying stock. For example, a stock trading at $29.50 may have one-month puts trading as follows: •$30 puts trading at $1.16 and$29 puts trading at 62 cents. A trader who is bearish on the underlying stock and wishes to structure a put ratio backspread that would profit from a decline in the stock, could buy two $29 put contracts for a total cost of$124 and sell short a $30 put contract to receive the$116 premium. (Remember that each option contract represents 100 shares.) The net cost of this 2:1 put ratio backspread, without taking commissions into account, is, therefore, $8. • If the stock declines to$28 at expiration, the trade breaks even (leaving aside the marginal $8 cost of putting on the trade.) If the stock falls to$27 at option expiry, the gross gain is $100; at$26, the gross gain is $200 and so on. • If, on the other hand, the stock appreciates to$30 by option expiry, the maximum loss is restricted to the cost of the trade or $8. The loss is restricted to$8 regardless of how high the stock trades by option expiry.