A put ratio spread combines the purchase of one put with the sale of a larger number of lower-strike puts on the same expiry, usually in a 1×2 ratio. It is often set up for a small premium or a credit. It pays the most if the underlying ends at the short strike and loses if it falls well beyond it.
How it works
The long put gives downside exposure from its strike. The two short puts finance it and cap the gain at the lower strike. Below that strike, the extra short put takes over and the position behaves like a naked short put. On equity indices, skew makes lower strikes trade at higher implied volatility, so the puts sold carry a richer vol than the put bought. That is what makes the structure cheap. Before expiry, the position is typically short vega and short gamma on the downside.
Example
Hypothetical three-month options on an index at 100. A trader buys one 95 put at 2.00 and sells two 90 puts at 1.10 each, a net credit of 0.20. At expiry above 95, the P&L is the 0.20 credit. At 90, the 95 put is worth 5, so the P&L is 5.20. Below 90, the P&L equals the index level minus 84.80: breakeven is 84.80, and at 80 the loss is 4.80.
On the desk
The structure looks harmless when spot is far above the strikes. The risk shows up in a fast sell-off, when implied volatility and skew rise together and the mark-to-market loss arrives long before expiry.
Educational definition. Worked examples are hypothetical. Not an offer or a recommendation.