Cl,apter 24: Ratio Spreads Using Puts 359 
expire worthless and the result would be a loss of commissions. However, there is 
downside risk. If XYZ should fall by a great deal, one would have to pay much more 
to buy back the two short puts than he would receive from selling out the one long 
put. The maximum profit would be realized if XYZ were at 45 at expiration, since the 
short puts would expire worthless, but the long January 50 put would be worth 5 
points and could be sold at that price. Table 24-1 and Figure 24-1 summarize the 
position. Note that there is a range within which the position is profitable - 40 to 50 
in this example. If XYZ is above 40 and below 50 at January expiration, there will be 
some profit, before commissions, from the spread. Below 40 at expiration, losses will 
be generated and, although these losses are limited by the fact that a stock cannot 
decline in price below zero, these losses could become very large. There is no upside 
risk, however, as was pointed out earlier. The following formulae summarize the sit­
uation for any put ratio spread: 
Maximum upside risk 
Maximum profit 
potential 
= Net debit of spread (no upside risk if done for 
a credit) 
= Striking price differential x Number of long 
puts - Net debit (or plus net credit) 
Downside break-even price = Lower strike price - Maximum profit potential + 
Number of naked puts 
The investment required for the put ratio spread consists of the collateral 
requirement necessary for a naked put, plus or minus the credit or debit of the entire 
position. Since the collateral requirement for a naked option is 20% of the stock 
TABLE 24-1. 
Ratio put spread. 
XYZ Price at Long January 50 Short 2 January 45 Total 
Expiration Put Profit Put Profit Profit 
20 +$2,600 -$4,600 -$2,000 
30 + 1,600 - 2,600 - 1,000 
40 + 600 600 0 
42 + 400 200 + 200 
45 + 100 + 400 + 500 
48 200 + 400 + 200 
50 400 + 400 0 
60 400 + 400 0