Chapter 24: Ratio Spreads Using Puts 361 
down. Rather, one should be able to close the position with the puts close to parity if 
the stock breaks below the downside break-even point. The spreader may want to buy 
in additional long puts, as was described for call spreads in Chapter 11, but this is not 
as advantageous in the put spread because of the time value premium shrinkage. 
This strategy may prove psychologically pleasing to the less experienced 
investor because he will not lose money on an upward move by the underlying stock. 
Many of the ratio strategies that involve call options have upside risk, and a large 
number of investors do not like to lose money when stocks move up. Thus, although 
these investors might be attracted to ratio strategies because of the possibility of col­
lecting the profits on the sale of multiple out-of-the-money options, they may often 
prefer ratio put spreads to ratio call spreads because of the small upside risk in the 
put strategy. 
USING DELTAS 
The "delta spread" concept can also be used for establishing and adjusting neutral 
ratio put spreads. The delta spread was first described in Chapter 11. A neutral put 
spread can be constructed by using the deltas of the two put options involved in the 
spread. The neutral ratio is determined by dividing the delta of the put at the higher 
strike by the delta of the put at the lower strike. Referring to the previous example, 
suppose the delta of the January 45 put is -.30 and the delta of the January 50 put is 
-.50. Then a neutral ratio would be 1.67 (-.50 divided by -.30). That is, 1.67 puts 
would be sold for each put bought. One might thus sell 5 January 45 puts and buy 3 
January 50 puts. 
This type of spread would not change much in price for small fluctuations in the 
underlying stock price. However, as time passes, the preponderance of time value 
premium sold via the January 45 puts would begin to tum a profit. As the underlying 
stock moves up or down by more than a small distance, the neutral ratio between the 
two puts will change. The spreader can adjust his position back into a neutral one by 
selling more January 45's or buying more January 50's. 
THE RATIO PUT CALENDAR SPREAD 
The ratio put calendar spread consists of buying a longer-term put and selling a larg­
er quantity of shorter-term puts, all with the same striking price. The position is gen­
erally established with out-of-the-money puts that is, the stock is above the striking 
price - so that there is a greater probability that the near-term puts will expire worth-