360 
FIGURE 24-1. 
Ratio put spread. 
+$500 
C: 
0 
~ ·5. 
X 
w 
iil 
(/) $0 (/) 
0 ....I 
0 
e a. 
Part Ill: Put Option Strategies 
Stock Price at Expiration 
price, plus the premium, minus the amount by which the option is out-of-the-money, 
the actual dollar requirement in this example would be $700 (20% of $5,000, plus the 
$200 premium, minus the $500 by which the January 45 put is out-of-the-money). As 
with all types of naked writing positions, the strategist should allow enough collater­
al for an adverse stock move to occur. This will allow enough room for stock move­
ment without forcing early liquidation of the position due to a margin call. If, in this 
example, the strategist felt that he might stay with the position until the stock 
declined to 39, he should allow $1,380 in collateral (20% of $3,900 plus the $600 in­
the-money amount). 
The ratio put spread is generally most attractive when the underlying stock is 
initially between the two striking prices. That is, if XYZ were somewhere between 45 
and 50, one might find the ratio put spread used in the example attractive. If the 
stock is initially below the lower striking price, a ratio put spread is not as attractive, 
since the stock is already too close to the downside risk point. Alternatively, if the 
stock is too far above the striking price of the written calls, one would normally have 
to pay a large debit to establish the position. Although one could eliminate the debit 
by writing four or five short options to each put bought, large ratios have extraordi­
narily large downside risk and are therefore very aggressive. 
Follow-up action is rather simple in the ratio put spread. There is very little that 
one need do, except for closing the position if the stock breaks below the downside 
break-even point. Since put options tend to lose time value premium rather quickly 
after they become in-the-money options, there is not normally an opportunity to roll