Ratio Spread
Prerequisite strategies: the backspread (this trade, reversed), the broken wing butterfly (the defined-risk version of the same shape) and the bull put spread. Clear the Level 3 gate and position sizing first, and hold uncovered-option permission before you read the worked example as a plan.
Why this structure exists
A vertical spread caps your profit at the far strike because you bought protection there. A ratio spread refuses to pay for it: you buy one option nearer the money, sell two further out, and the second short is funded by nothing except the broker's willingness to lend against your account. What that buys is a payoff which peaks at the strike you are short, financed by the market rather than by you.
The professional reason to do it is skew, not direction. FTSE 100 downside puts trade at a higher implied volatility than at-the-money ones — 15.62% at 10,300 against 14.54% at 10,600 in the chain modelled here — so selling two of the dearer strike against one of the cheaper opens for a credit and pushes the breakeven a long way out. It is also why the mirror-image call ratio is not a FTSE trade: index call skew runs the other way, so the same 1×2 on the call side breaks even only 0.69 standard deviations above spot. If you cannot say which side of the skew you are on, you are not trading skew.
The nearest simpler alternative is the broken wing butterfly: identical shape, plus a far wing that turns the tail into a number. Why not just do that instead? Because the wing costs money — £500 to buy the 10,000 put on day one, turning a £139 credit into a £361 debit. For almost every UK retail account it is worth it.
Construction
| Leg | Buy / Sell | Quantity | Strike rule | Expiry rule | Target delta | Price |
|---|---|---|---|---|---|---|
| Long leg | BUY (debit) | 1 contract | 1–2% out of the money | 45–75 days, monthly | 0.35–0.45 | 178.5 pts = −£1,785 |
| Short legs | SELL (credit) | 2 contracts | Width ≥ 2.5% of the index beyond the long | Same expiry | 0.20–0.28 each | 96.5 pts = +£1,930 |
| NET | Net credit | 1×2 ratio | 10,600 / 10,300 | 60 days, 16 Oct 2026 | +0.08 | +£145, £139 after costs |
Three inequalities, all checkable on the chain before you commit:
Max profit = width × multiplier + net credit = 300 × £10 + £139. Breakeven = short strike − (max profit ÷ multiplier) = 10,300 − 313.9. Below it the loss is (breakeven − index) × £10 — no second breakeven, and no floor other than an index of zero.
The peak is the point of the whole trade and you will almost never touch it: the dashed line shows that with 60 days left, at 10,300, the structure marks near zero. The gap between the lines is the time value you are short, and it only closes on the last day — at the exact level where your gamma is largest.
Entry criteria
| Gate | Rule | Reason |
|---|---|---|
| Implied volatility | IV rank above 40 | Short £100.68 of vega a point; entering cheap means being marked against before you are wrong |
| Skew | Short-strike IV at least 0.75 points above the long-strike IV | 15.62% against 14.54% here. Without it there is no credit and no reason to be short two |
| Term structure | Front month not inverted against the next | Inversion means an event is priced into the strikes you are selling |
| Days to expiry | 45–75, monthly series only | Inside 45 the gamma at the short strike outruns the credit |
| Strikes | Long 0.35–0.45 delta; shorts 0.20–0.28; width ≥ 2.5% of the index | Narrowing the width raises the credit and drags the breakeven toward spot — Branch D |
| Breakeven | At least 1 SD from spot — 9,986 is 1.25 SD | The gate the mirror-image call ratio fails, at 0.69 SD |
| Liquidity | Quote ≤ 3 index points a leg; open interest ≥ 250 | £45 in and £45 out against a £145 credit |
| Underlying | FTSE 100 index options — European, cash settled | No early assignment, no SDRT; the same 1×2 on ICE single stock delivers 1,000 shares |
| Event calendar | No MPC or CPI print inside the last ten days | The expiring series stops trading shortly after 10:15 on the third Friday |
Do not enter if: the structure prices at a net debit; the initial requirement is above 5% of net liquidation value; the breakeven sits inside 1 SD; you already hold short premium in a correlated index, because in a volatility event those are one position and not two; or you cannot state, in pounds, the requirement after a 20% gap.
Greeks at entry and how they evolve
| Greek | At entry (60 DTE, 10,750) | 30 DTE, unchanged | 7 DTE, unchanged | +1 SD (11,360) at 30 DTE | −1 SD (10,140) at 30 DTE |
|---|---|---|---|---|---|
| Delta | +£0.82/pt | −£0.33/pt | −£1.92/pt | −£0.20/pt | +£3.98/pt |
| Gamma | −£0.30 | −£0.19 | +£0.96 | +£0.06 | −£1.04 |
| Theta | +£14.46/day | +£11.50/day | −£29.33/day | −£1.38/day | +£41.53/day |
| Vega | −£100.68/pt | −£36.02/pt | +£29.79/pt | +£7.49/pt | −£149.37/pt |
Modelled at 13.98% at-the-money implied volatility with a downside skew, 4% rates, 3.5% dividend yield — the same surface as the backspread page, whose figures are these with the signs reversed. Gamma is pounds of delta lost per 100-point fall.
Vega is what you are paid for; gamma is what eventually bills you. But the column that decides this trade is the last one. An ordinary one-standard-deviation fall takes vega from −£100.68 to −£149.37 a point and delta from +£0.82 to +£3.98: the position gets larger, in the direction it is already losing, on exactly the day volatility rises. That is short gamma, and it is why the honest answer to "what happens if it goes wrong" is not a number on the payoff diagram but a number on the margin screen. The character flips at the short strike — above 10,300 you hold a decaying obligation, below it an accelerating one.
FTSE 100 at 10,750, and you think the autumn drift is down but not far
The FTSE 100 closed at 10,750.11 on Friday 14 August 2026; this models 10,750. The ICE Futures Europe FTSE 100 option is £10 per index point, European style and cash settled at the EDSP, tick 0.5 points (£5). The October series stops trading shortly after 10:15 on Friday 16 October 2026, 60 days away.
The trade: buy 1 × October 10,600 put at 178.5, sell 2 × October 10,300 put at 96.5.
Branch A — 10,450 with 40 days left. Everything is working and the mark is +£70. That is the entire reward for being right so far, and it is the number that persuades people to add contracts. ACTION: nothing. Diarise the 21-day check.
Branch B — 10,150 with 30 days left, volatility 3 points higher. Held to settlement this pays +£1,639. Today it marks −£482, delta is +£3.98 a point against you, and the requirement has risen to £18,814.
Branch C — 9,900 with 21 days left, volatility 6 points higher. You are through the breakeven: the mark is −£1,659 and the requirement is £20,093, up £6,683 while you lost. ACTION: close. Every further 100 points costs another £1,000 and raises the requirement again.
Branch D — the same trade with the shorts at 10,400. Narrowing the width to 200 points lifts the credit from £139 to £591, which reads like a better trade and is not: the breakeven rises to 10,140.9, exactly 1.00 SD from spot, and the loss at −2 SD deepens from −£4,551 to −£6,109. You were paid £452 to move your breakeven 155 points closer to where the index is. It fails this page's own entry gate.
Branch E — 10,900 with 30 days left. The index went the other way, the mark is +£348 and £11,372 is still tied up. The credit is effectively earned and the margin is not released until you act. ACTION: close.
This is a single, hand-picked, favourable scenario. It is not a typical or expected outcome. Premiums are modelled from a Black-Scholes surface calibrated to 13.98% at-the-money volatility with a downside skew, not taken from a live chain, and real FTSE 100 quotes away from the front month are wider. Past performance is not a reliable indicator of future results.
Management and adjustment
| Trigger | Diagnosis | Action | Do NOT do this |
|---|---|---|---|
| Drift to 10,450 at 40 DTE (+£70) | Working as designed | Nothing. Diarise the 21-day check | Add a second structure because the first is green |
| At the short strike, 10,300, with >21 DTE (−£87) | Standing on the peak, which is the edge of the cliff | CLOSE. The peak is a settlement-day artefact, not a mark you can take | Hold for the £3,139; it exists at one level on one morning |
| Below the shorts, 10,150 at 30 DTE (−£482) | Screen and settlement disagree; delta +£3.98/pt | Close, or buy the 10,000 put for £1,341 and accept a −£1,202 floor | Roll the shorts down for a net debit to buy back the tail |
| Through the breakeven, 9,900 at 21 DTE (−£1,659) | The uncovered leg is now the position | CLOSE. The case where the correct action is to close, not adjust | Wait for the bounce; the requirement rises faster than the loss |
| IV up ≥ 4 points, index unchanged | Short £100.68 of vega: marked against without being wrong | Hold if the requirement is under 25% of equity; otherwise reduce | Sell a third contract into the higher volatility |
| IV down ≥ 3 points, index unchanged | Paid early for the reason you were here | Close and bank it | Wait for the peak the diagram promises |
| Rally to 10,900 at 30 DTE (+£348) | Credit effectively earned; £11,372 still tied up | Close and release the margin | Leave it on "because it is free money now" |
| Requirement > 50% of net liquidation value | The broker is managing this position, not you | CLOSE enough of it to get back under 25% | Wait for the margin call — forced liquidation takes the worst prices of the day |
ROLL WHEN: only up and out — the index has rallied, the short strikes are far behind and more than 30 days remain — and then as two closes and two opens, a new trade with a new £13,410 on the ticket. ROLL TO: the same width and delta band in the next monthly. DO NOT ROLL a credit structure for a net debit, ever, and never roll the shorts down to chase a falling index: that is buying a bigger version of the position you are losing on. Going inverted is not available here; on a ratio, moving the shorts through the long strike simply widens the naked exposure. Where defence stops: once the index is through 9,986, or the requirement passes a quarter of your equity, the only moves left are buying the wing or closing.
Exit rules
If all four are silent, do nothing — but note that doing nothing still costs £13,410 of buying power.
Margin and broker reality
A cash account cannot hold this and neither can an ordinary margin account: the second short is uncovered, so you need uncovered-option permission and, in practice, portfolio margin. Interactive Brokers UK requires USD 110,000 of net liquidation value to upgrade an existing account and restricts margin-increasing trades below USD 100,000. Send the 1×2 as one combination order; if the platform rejects the ratio, do not leg into it during the session.
The figures below use the Cboe strategy-based schedule for an uncovered broad-based index option, which IBKR reproduces in its published options-margin table and which you can recompute yourself: option proceeds plus 15% of the index value, less any out-of-the-money amount, floored at proceeds plus 10% of the aggregate exercise price; a debit spread requires only the debit paid in full. The broker decomposes the structure into a 10,600/10,300 bear put spread plus one naked 10,300 put.
Contrast the backspread, which is these three legs reversed: its requirement is £3,000 and never moves, because strike differentials do not care what the index does. That is the difference between defined and undefined risk expressed as one number. And a UK cost no schedule shows: away from front-month round strikes the ICE FTSE 100 chain trades wide, so 3 points a leg is £45 in and £45 out — £90 against a £145 gross credit, 62% of it.
Stress test
| Scenario (move at once, 30 DTE left) | Index | Mark-to-market | Held to expiry | Requirement | Equity needed |
|---|---|---|---|---|---|
| −20% gap | 8,600 (IV +18) | −£13,806 | −£13,861 | £30,643 | £44,449 |
| −2 SD | 9,531 (IV +7) | −£4,779 | −£4,551 | £22,896 | £27,675 |
| −1 SD | 10,141 (IV +3) | −£512 | +£1,549 | £18,814 | £19,326 |
| Unchanged | 10,750 | +£408 | +£139 | £12,863 | £12,455 |
| +1 SD | 11,359 (IV −1) | +£190 | +£139 | £11,158 | £10,968 |
| +2 SD | 11,969 (IV −2) | +£143 | +£139 | £11,122 | £10,979 |
One standard deviation over the 60 days is 609.5 points, 5.67%. Volatility responses are modelled rather than observed.
Read the last two columns together and the mechanism is plain: in every adverse row the requirement rises while the equity falls. That is arithmetic, not bad luck — the requirement is anchored to 15% of the index value plus the market value of an option that is getting more expensive precisely because you are losing on it. Between the unchanged row and the gap row the requirement grows by £17,780 while the mark falls by £14,214: a £31,994 swing in what the account must carry, produced by one overnight session. On 19 October 1987 the FTSE 100 fell 10.8% and a further 12.2% the next day; on 12 March 2020 it fell 10.9% in one. A 20% gap is not the tail of this distribution, it is a part of it that has already happened.
The way the ratio spread has actually hurt people is subtler than the crash, though: it is Branch B. An unremarkable drift puts the index just below the short strikes with a month to run, the screen shows a small loss, the settlement value shows a healthy profit, and the trader holds — because the diagram says the peak is right there. It is right there. So is the cliff.
close when the index trades below the short strike with more than 21 days left, and never carry the uncovered leg into the final week.What to trade instead
Simpler, from the tier below: a bull put spread expresses the same "down a bit, not a lot" view with a maximum loss you can write down, no uncovered leg, a requirement fixed at the strike differential and one fewer CGT event. It collects less. A bear put spread says the directional half as a pure debit, with no written premium and so no grant-date charge.
More precise, from inside this tier: the broken wing butterfly is this page with the far wing bought — £500 on day one to turn £99,861 of tail into a £361 floor, which is the best-value £500 in the curriculum. The backspread is this trade reversed: long the convexity you are short here, with a defined £3,151 maximum loss and a requirement that never moves. If the credit rather than the shape is what attracted you, compare the short straddle family, where at least the obligation is properly paid for.
Risk statement
Uncovered options are among the highest-risk instruments available to a retail client: losses are not limited to the amount invested, can exceed the account balance, and the broker may liquidate positions without notice. This is educational material about mechanics, margin and UK tax treatment, not a recommendation to trade the FTSE 100 or anything else, and it takes no account of your circumstances. Every premium and requirement here is modelled rather than quoted; your own order preview governs.