Put Backspread

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The Put Backspread (reverse Put Ratio Spread) is a bearish strategy in options trading that involves selling a number of put options and buying more put options of the same underlying stock and expiration date at a lower strike price. It is an limited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience significant downside movement in the near term.

A 2:1 Put Backspread can be implemented by buying a number of puts at a higher strike and buying twice the number of puts at a lower strike.

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Profit potential

This strategy profits when the stock price makes a strong move to the downside beyond the lower breakeven point. There is no limit to the maximum possible profit for the Put Backspread.

Limited Risk

Maximum loss for the Put Backspread is limited and is incurred when the underlying stock price at expiration is at the strike price of the long puts purchased. At this price, both the long puts expire worthless while the short put expires in the money. Maximum loss is equal to the intrinsic value of the short put plus or minus any debit or credit taken when putting on the spread.

Breakeven Point(s)

There are 2 break-even points for the Put Backspread position. The breakeven points can be calculated using the following formulae.

Example

Suppose XYZ stock is trading at $48 in June. An options trader executes a 2:1 Put Backspread by selling a JUL 50 put for $400 and buying two JUL 45 puts for $200 each. The net debit/credit taken to enter the trade is zero.

On expiration in July, if XYZ stock is trading at $45, both the JUL 45 puts expire worthless while the short JUL 50 put expires in the money with $500 in intrinsic value. Buying back this put to close the position will result in the maximum loss of $500 for the options trader.

If XYZ stock drops to $40 on expiration in July, all the options will expire in the money. The short JUL 50 put is worth $1000 and needs to be bought back to close the position. Since the two JUL 45 puts bought is now worth $500 each, their combined value of $1000 is just enough to offset the losses from the written put. Therefore, he achieves breakeven at $40.

Below $40 though, there will be no limit to the gains possible. For example, at $30, each long JUL 45 put will be worth $1500 while his single short JUL 50 put is only worth $2000, resulting in a profit of $1000.

If the stock price had rallied to $50 or higher at expiration, all the options involved will expire worthless. Since the net debit to put on this trade is zero, there is no resulting loss.

These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.

Commissions

For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.

For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.

Similar Strategies

The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.

Protective Call

Long Put

Ratio Spread

The converse strategy to the backspread is the ratio spread. Ratio spreads are used when little movement is expected of the underlying stock price.

Call Backspread

The backspread can also be constructed using calls. Unlike the Put Backspread, the Call Backspread is a bullish strategy.

Before expiration and assignment

The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.