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Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Strategy
Advanced
Put Ratio Spread
Sell two puts and buy one further OTM put.
Detail
The Put Ratio Spread is a strategy where the trader sells two puts at a higher strike and buys one put at a lower strike, all with the same expiration. It is often used as a credit strategy to profit from sideways or slightly bearish markets. Maximum profit occurs if the underlying stays above the short strikes. However, if the price drops significantly below the long put, the uncovered short put creates substantial risk.
The Put Ratio Spread involves selling two put options at a higher strike while simultaneously buying one put option at a lower strike. All options share the same expiration date. The goal is to benefit from time decay and price stagnation above the short strikes. When opened for a net credit, it can provide income if the underlying remains stable. However, if the price drops below the long put, one short put remains uncovered, leading to increasing losses. The strategy is best suited for experienced traders with a controlled portfolio.
Optimal conditions
Best used in high implied volatility environments with an expectation of sideways movement or a slight decline. Ideally, the short strikes are just below the current price and the long put is further OTM. It is not recommended when expecting a sharp drop.
Max profit
Maximum profit occurs if the underlying expires just above the short put strikes. The profit equals the net premium received.
Max loss
Loss occurs if the underlying falls below the long put strike. As price drops further, losses increase due to the uncovered short put.
Risks
Main risk is a significant drop in the underlying asset. One of the short puts becomes uncovered, resulting in increasing losses. The position should be monitored closely and adjusted as needed.
Greeks
Delta: Initially near zero, becomes increasingly negative as price drops.\nTheta: Positive when price stays between strikes due to short puts.\nVega: High IV increases credit but also raises the cost of the long put.\nGamma: High between strikes and during sharp downward moves.
Variations
Alternative: 1:2 ratio put spread as a method to initiate equity ownership. Can also be combined with a short call for a natural hedge.
Usage example
You expect a slight decline or sideways movement in XYZ, currently at $85. You sell 2x puts at strike 80 and buy 1x put at strike 70. If XYZ expires above 80, you keep the full credit. If it reaches 70, you realize max profit. Below 70, losses begin to accumulate.
DTE
7–30 days
IV (implied volatility)
High
Premium
Usually opened for a credit – difference between two short puts and one long put.
Margin
Margin is required due to one uncovered short put in the structure.
Notes
Monitor the underlying closely and manage the position if price approaches the long put.
Tags
put ratio spread, credit strategy, short put, delta neutral, bearish spread
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