Long Ratio Vertical Spread with Puts

Overview:

Vertical spreads got their name from the days when traders would trade on the open floor – all of the quotes would be listed vertically. The strategy is employed with the sale of two in-the-money puts and the purchase of one deeper in-the-money put. All of the options will expire in the same month.

Main Uses:

1. The first reason an investor would trade this strategy is if the investor is only slightly bearish on the underlying stock. The investor is hoping the stock will have a small decrease in price but then doesn’t decrease past the break-even point. The investor employs this strategy as opposed to simply purchasing puts to reduce the overall cost.
2. The second reason an investor would employ this strategy is to gain additional leverage.

Profit / Loss Calculator:

The below graph is a profit / loss graph of a long ratio vertical spread with puts using the OptionsHouse P&L calculator. The current stock price is at $113.18. Two in-the-money put options were sold with a strike price of $107. One deeper in-the-money put options was bought with a strike price of $110. If the stock decreases below $103.53, the investor will lose money. If the stock increases above $103.53, the investor will make money.

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