4/8/23, 6:58 PM Put Front Spread | Put Ratio Vertical Spread - The Options Playbook

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The Options Strategies » Front Spread w/Puts

Front Spread w/Puts

AKA Ratio Vertical Spread

The Setup
Sell two puts, strike price A
Buy a put, strike price B
Generally, the stock will be at or above
strike B.

NOTE: All options have the same expiration

month.

Who Should Run It

NOTE: This graph assumes the strategy was established for a net
credit. All-Stars only

NOTE: Due to the significant risk if the stock

The Strategy moves sharply downward, this strategy is
suited only to the most advanced option
Buying the put gives you the right to sell stock at strike price B. traders. If you are not an All-Star trader,
Selling the two puts gives you the obligation to buy stock at consider running a skip strike butterfly with
strike price A if the options are assigned. puts.
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This strategy enables you to purchase a put that is at-the-money

or slightly out-of-the-money without paying full price. The goal
is to obtain the put with strike B for a credit or a very small debit
When to Run It
by selling the two puts with strike A.
You’re slightly bearish. You want the stock
Ideally, you want a slight dip in stock price to strike A. But watch to go down to strike A and then stop.
out. Although one of the puts you sold is “covered” by the put
you buy with strike B, the second put you sold is “uncovered,” Break-even at Expiration
exposing you to significant downside risk.

If the stock goes too low, you’ll be in for a world of hurt. So If established for a net debit, there are two
beware of any abnormal moves in stock price and have a stop- break-even points:
loss plan in place.
Strike B minus the net debit paid to
establish the position.
Options Guy's Tips Strike A minus the maximum profit
potential.

If established for a net credit, there is only one

Some investors may wish to run this strategy using index break-even point:
options rather than options on individual stocks. That’s because
historically, indexes have not been as volatile as individual Strike A minus the maximum profit
stocks. Fluctuations in an index’s component stock prices tend to potential.
cancel one another out, lessening the volatility of the index as a
whole. The Sweet Spot
The maximum value of a front spread is usually achieved when
it’s close to expiration. You may wish to consider running this You want the stock price exactly at strike A at
strategy shorter-term; e.g., 30-45 days from expiration. expiration.

Maximum Potential Profit

If established for a net debit, potential profit is
limited to the difference between strike A and
strike B, minus the net debit paid.

If established for a net credit, potential profit

is limited to the difference between strike A
and strike B, plus the net credit.

Maximum Potential Loss

If established for a net debit:

Risk is limited to the net debit paid if

the stock price goes up.
Risk is substantial but limited to strike
A plus the net debit paid if the stock
goes to zero.

If established for a net credit:

Risk is substantial but limited to strike

A minus the net credit if the stock goes
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4/8/23, 6:58 PM Put Front Spread | Put Ratio Vertical Spread - The Options Playbook

to zero.

Ally Invest Margin

Requirement
Margin requirement is the requirement for the
uncovered short put portion of the front
spread.

NOTE: If established for a net credit, the

proceeds may be applied to the initial margin
requirement.

After this position is established, an ongoing

maintenance margin requirement may apply.
That means depending on how the underlying
performs, an increase (or decrease) in the
required margin is possible. Keep in mind this
requirement is subject to change and is on a
per-unit basis. So don’t forget to multiply by
the total number of units when you’re doing
the math.

As Time Goes By
For this strategy, time decay is your friend.
It’s eroding the value of the option you
purchased (bad). However, that will be
outweighed by the decrease in value of the
two options you sold (good).

Implied Volatility
After the strategy is established, in general
you want implied volatility to go down. That’s
because it will decrease the value of the two
options you sold more than the single option
you bought.

The closer the stock price is to strike A, the

more you want implied volatility to decrease
for two reasons. First, it will decrease the
value of the near-the-money options you sold
at strike A more than the in-the-money option
you bought at strike B. Second, it suggests a
decreased probability of a wide price swing,
whereas you want the stock price to remain
stable at or around strike A.

Check your strategy with Ally Invest tools

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