Put Ratio Back Spread Strategy Explained: Trade Setup, Payoff, Scenarios and FAQs

Introduction

Imagine you’re buying insurance for your car, but the insurer also gives you cashback if you drive safely and there’s no accident. Now, if a serious accident happens, you’re fully covered (big payout). But if nothing happens, you still walk away with a small benefit (the cashback).

That’s exactly how the Put Ratio Back Spread works.

You pay for extra protection (buying more Puts), but the money you get from selling one Put helps offset the cost. So you either:

• Win big if the market crashes
• Lose a small, fixed amount if nothing major happens
• Or even profit a bit if things stay stable 

The Put Ratio Back Spread is a strategic options play designed for traders anticipating a sharp downside move in the market. This strategy offers a compelling risk-reward profile that sets it apart from conventional bearish strategies.

Here’s what the Put Ratio Back Spread offers at a glance:

• Unlimited profit potential if the market drops significantly
• Limited loss if the market stays within a defined range
• Small profit or break-even if the market moves upward
  

In simple terms, the strategy is engineered to benefit from volatility spikes and steep declines, while keeping risk defined and often initiating with a net credit or minimal debit.

It’s particularly useful when you’re bearish but don’t want to risk large premiums or margin, offering an alternative to simply buying Puts or setting up Bear Put Spreads. With the right structure, it can even allow traders to profit in both stagnant and falling markets.

Key Takeaways

• Put Ratio Back Spread Basics: Understand the structure and mechanics of the strategy
• When to Use: Perfect for anticipating breakdowns, high-volatility events, or bearish reversals
• Setup & Payoff: Learn how to structure trades, calculate breakevens, and estimate profit/loss
• Strategy Pros & Cons: Compare with Long Puts and Bear Put Spreads to know when it’s better

Ideal Use Case for Put Ratio Back Spread

1. Expecting a Breakdown Below Support

When a stock or index is trading close to a strong support level and showing signs of weakness—like heavy selling volumes, bearish chart patterns (e.g., a wedge breakdown or head-and-shoulders formation), or negative momentum—it often signals an impending breakdown.

Instead of buying a naked Put, which can be expensive and risky, the Put Ratio Back Spread gives you an aggressive bearish position with defined downside risk and unlimited profit if the support breaks decisively.

2. Ahead of Major Events or Announcements

Before big events—like RBI policy meetings, Union Budget, U.S. Fed announcements, or quarterly earnings—markets tend to get nervous. This nervousness leads to a rise in implied volatility, especially in options.

If you believe the event could result in a sharp drop, the Put Ratio Back Spread allows you to benefit from both the big  fall in price and the rise in volatility, all while keeping your loss capped if the market doesn’t move as expected.

3. Spotting a Bearish Reversal After a Rally

Markets often rally too far too fast. When that rally starts showing signs of exhaustion—like bearish divergence in RSI, or reversal candlestick patterns (shooting star, bearish engulfing, etc.)—a downtrend might be around the corner.

Deploying a Put Ratio Back Spread at this point helps you position for that reversal, giving you a cost-effective entry with the potential to profit from a sharp big  decline.

4. Bearish View with Rising Volatility

In periods of uncertainty—say, before election results, after a long rally, or during geopolitical tension—volatility often expands, pushing option premiums higher.

If you have a bearish bias and expect both a price drop and volatility surge, this strategy plays perfectly to that scenario. With positive vega exposure from the long Puts, the rising IV adds more value to your trade.

Strategy Setup & Payoff Mechanics

Setup:

• Buy 2 Puts – OTM (same expiry)
• Sell 1 Put – ATM or slightly ITM

Key Calculations:

• Net Premium = (Premium from Sold Put) − (2 × Premium of Bought Puts)
• Max Loss = Difference in Strike Prices − Net Credit (if any)
• Lower Breakeven = Lower Strike − [(Strike Difference − Net Credit) 
• Upper Breakeven = Higher Strike − Net Credit
• Max Profit = Unlimited (as underlying falls deeply)
  

Example of Put Ratio Back Spread: 

Let’s assume Nifty is currently trading at 22,600, and for the past few weeks, it’s been struggling to sustain above key support levels due to mixed global cues and weak earnings season. There’s increased selling pressure near resistance, and traders are nervous ahead of the upcoming RBI policy announcement.

As a result, we’ve seen a noticeable spike in implied volatility, suggesting the market is bracing for a sharp move—likely to the downside. This setup creates a perfect opportunity to deploy a Put Ratio Back Spread, allowing us to benefit from a breakdown while limiting our risk.

• Net Credit = 170 − (2 × 75) = 20
• Lot Size = 75
• Strike Difference = 22,600 − 22,200 = 400

Breakeven Points

• Upper Breakeven = 22,580
• Lower Breakeven = 21,820

Profit & Loss Scenarios

Scenario 1: Nifty closes at 22,600 or above

All options expire worthless.

• Net Profit = 20 pts  (net credit) × 75 = ₹1,500

Scenario 2: Nifty closes at 22,200 (Max Loss Point)

• 22,600 PE = 400  pts (intrinsic value)
• 22,200 PE = 0
• Net Payoff = (−400) + (2 × 0) + 20 = −380 pts
• Total Loss = 380 pts × 75 = ₹28,500 (maximum loss)

Scenario 3: Nifty closes at 22,000

• 22,600 PE = 600 Pts  (intrinsic value)
• 22,200 PE = 200  Pts  (intrinsic value) each × 2 = 400
• Net Payoff = −600 + 400 + 20 = −180
• Loss = 180 × 75 = ₹13,500

Scenario 4: Nifty closes at 21,820 (Lower Breakeven)

• 22,600 PE = 780   Pts  (intrinsic value)
• 22,200 PE = 380 × 2 = 760   Pts  (intrinsic value)
• Net Payoff = −780 + 760 + 20 = 0
• Break-even

Scenario 5: Nifty closes at 21,600

• 22,600 PE = 1,000   Pts  (intrinsic value)
• 22,200 PE = 600 × 2 = 1,200   Pts  (intrinsic value)
• Net Payoff = −1,000 + 1,200 + 20 = 220   Pts  (intrinsic value)
• Profit = 220 × 75 = ₹16,500

Scenario 6: Nifty crashes to 21,200

• 22,600 PE = 1,400   Pts  (intrinsic value)
• 22,200 PE = 1,000 × 2 = 2,000   Pts  (intrinsic value)
• Net Payoff = −1,400 + 2,000 + 20 = 620   Pts  (intrinsic value)
• Profit = 620 × 75 = ₹46,500

Advantages & Risks of Put Ratio Back Spread

 Pros

• Unlimited Profit Potential on the Downside: This strategy shines when the market falls sharply. The deeper the decline, the more valuable your long Puts become—resulting in uncapped profits.
• Defined and Limited Risk: Even if the market doesn’t move as expected, your maximum loss is fixed and known upfront. This helps you take aggressive bearish positions without the fear of unlimited risk.
• Potential for Net Credit Entry: If structured well, the trade can be initiated for a net credit. This means you not only set up the trade with zero cost (or a small profit upfront), but also stand to gain slightly if the market moves upward.
• Benefits from Rising Volatility: This strategy has positive vega exposure, meaning any increase in implied volatility—common before major events or during market uncertainty—adds value to your long Puts.

 Cons

• Time Decay Can Work Against You: In stagnant or sideways markets, the value of your long options can decline due to negative theta. Without a strong move, the premiums  will decay its  value over time.
• Strike Selection is Crucial: The success of this strategy depends heavily on choosing the right strikes. If the short Put is too close to the long ones, you risk shrinking your breakeven zone and increasing potential loss.
• Most Risky in Mild Declines: The worst-case scenario is when the market drops slightly—just enough to put your short Put deep in-the-money, but not enough for your long Puts to compensate. This is where the maximum loss occurs.

Comparison with Similar Strategies

Conclusion

The Put Ratio Back Spread is a robust bearish strategy that combines limited risk with the potential for unlimited gains in case of sharp downside moves. When structured correctly, it can be a net credit strategy that not only limits loss but even offers gains in mildly bullish.

Perfect for high-volatility setups, market breakdowns, or macro-event hedging, the Put Ratio Back Spread is an essential tool in the advanced trader’s playbook. Like all complex strategies, success lies in timing, strike selection, and volatility selection.