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Options library / Level 3 Exposure / Strategy 21

Ratio spread for UK investors: the first genuinely uncovered leg

Buy one option, sell two further out, and the extra short is covered by nothing at all. This page prices a FTSE 100 put ratio in pounds and answers the question the rest of the internet leaves open: what does the unlimited side actually cost to hold?

£139Net credit for one structure
£13,410Initial margin to hold it
£30,643Requirement after a 20% gap
£44,449Equity below which you are liquidated
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21

Ratio Spread

Buy one, sell two — the backspread run backwards, and the first structure here with no floor
L3 ExposureDirectional, short volatilityUNDEFINED RISK£13,410 margin per FTSE 100 structure

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.

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One of these short options is covered by nothingEverything in this curriculum before now had a floor. This does not. In the FTSE 100 example below the loss runs at £10 an index point below 9,986 and stops only when the index reaches zero — £99,861 — against a net credit of £139. It costs £13,410 of margin to hold, ninety-six times the credit, and that requirement rises as the position loses: £30,643 after a 20% overnight gap, when the mark is −£13,806. Any account funded with less than £44,449 is force-liquidated by one contract.

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

LegBuy / SellQuantityStrike ruleExpiry ruleTarget deltaPrice
Long legBUY (debit)1 contract1–2% out of the money45–75 days, monthly0.35–0.45178.5 pts = −£1,785
Short legsSELL (credit)2 contractsWidth ≥ 2.5% of the index beyond the longSame expiry0.20–0.28 each96.5 pts = +£1,930
NETNet credit1×2 ratio10,600 / 10,30060 days, 16 Oct 2026+0.08+£145, £139 after costs

Three inequalities, all checkable on the chain before you commit:

  • 2 × short premium > long premium. Here 193.0 against 178.5. Satisfy it and there is no upside risk at all — above 10,600 every leg expires worthless and you keep the credit. Fail it and you have paid a debit for undefined risk.
  • Breakeven ≥ 1 SD from spot. One standard deviation over 60 days at 13.98% volatility is 609.5 points; the breakeven at 9,986.1 is 764 points away, 1.25 SD. Anything closer and you are selling the middle of the distribution.
  • Initial requirement ≤ 5% of net liquidation value. £13,410 means an account of £268,200, and one contract is the minimum size. This is the inequality that decides whether you may trade it at all.
Net credit
£139
Max profit
£3,139 at 10,300
Breakeven
9,986.1
Initial margin
£13,410
Risk type
UNDEFINED

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.

Payoff — FTSE 100 October 10,600/10,300 put ratio, £ P&L per 1×2 structure
£ P&L per 1×2 structure (£10 per index point) Max profit +£3,139 at 10,300 +£3,139 +£2,000 £0 −£2,000 −£3,861 9,800 10,200 10,600 11,000 FTSE 100 index level Short 2 × 10,300 Long 1 × 10,600 Spot 10,750 Breakeven 9,986 Value today, 60 DTE Loss −£10 a point, no floor +£139 above 10,600

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

GateRuleReason
Implied volatilityIV rank above 40Short £100.68 of vega a point; entering cheap means being marked against before you are wrong
SkewShort-strike IV at least 0.75 points above the long-strike IV15.62% against 14.54% here. Without it there is no credit and no reason to be short two
Term structureFront month not inverted against the nextInversion means an event is priced into the strikes you are selling
Days to expiry45–75, monthly series onlyInside 45 the gamma at the short strike outruns the credit
StrikesLong 0.35–0.45 delta; shorts 0.20–0.28; width ≥ 2.5% of the indexNarrowing the width raises the credit and drags the breakeven toward spot — Branch D
BreakevenAt least 1 SD from spot — 9,986 is 1.25 SDThe gate the mirror-image call ratio fails, at 0.69 SD
LiquidityQuote ≤ 3 index points a leg; open interest ≥ 250£45 in and £45 out against a £145 credit
UnderlyingFTSE 100 index options — European, cash settledNo early assignment, no SDRT; the same 1×2 on ICE single stock delivers 1,000 shares
Event calendarNo MPC or CPI print inside the last ten daysThe 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

GreekAt entry (60 DTE, 10,750)30 DTE, unchanged7 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.

UK worked example — FTSE 100 index options, £10 per index point

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.

Premium paid, 1 × 10,600 put:178.5 × £10 = −£1,785.00
Premium received, 2 × 10,300 put:2 × 96.5 × £10 = +£1,930.00
Commission (modelled, £2.00 a contract × 3):£6.00
Net credit:14.5 pts = £145.00, £139.00 after costs
Initial margin held:£13,410.00 — 96 times the credit
Breakeven (10,300 − £3,139 ÷ £10):9,986.1, a 7.1% fall
MAX PROFIT, at 10,300 on 16 October:£3,139.00

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.

Close now:−£482
Or buy 1 × 10,000 put at 134.1 to cap it:−£1,341, and the floor becomes −£1,202
Or hold and be right:+£1,639
ACTION:close, or buy the wing. Do not carry a naked short into the last month for £1,639.

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

TriggerDiagnosisActionDo NOT do this
Drift to 10,450 at 40 DTE (+£70)Working as designedNothing. Diarise the 21-day checkAdd 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 cliffCLOSE. The peak is a settlement-day artefact, not a mark you can takeHold 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/ptClose, or buy the 10,000 put for £1,341 and accept a −£1,202 floorRoll 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 positionCLOSE. The case where the correct action is to close, not adjustWait for the bounce; the requirement rises faster than the loss
IV up ≥ 4 points, index unchangedShort £100.68 of vega: marked against without being wrongHold if the requirement is under 25% of equity; otherwise reduceSell a third contract into the higher volatility
IV down ≥ 3 points, index unchangedPaid early for the reason you were hereClose and bank itWait for the peak the diagram promises
Rally to 10,900 at 30 DTE (+£348)Credit effectively earned; £11,372 still tied upClose and release the marginLeave it on "because it is free money now"
Requirement > 50% of net liquidation valueThe broker is managing this position, not youCLOSE 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

  • Profit target: +£450 — 3.2 times the credit, and 72% of the best mark the structure ever offers with 21 days still on it (£624, at 10,525). At an unchanged index it fires with about 25 days left.
  • Stop: a level, not a number. Close if the index trades below the short strike with more than 21 days remaining, and close unconditionally below the 9,986 breakeven. A money stop is unreliable here because mark and settlement disagree by up to £2,121 (Branch B).
  • Time stop: 21 DTE, unconditional — and not a concession: at an unchanged index the mark at 21 days is +£492 against the +£139 you collect for holding to settlement. It is the better exit as well as the safer one.
  • Settlement exit: be flat before the October series stops trading shortly after 10:15 on Friday 16 October 2026. Cash settlement means no assignment, but the EDSP is struck in an auction you cannot trade through, and a pin at 10,300 is where this structure's gamma is largest.

If all four are silent, do nothing — but note that doing nothing still costs £13,410 of buying power.

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UK tax and wrapper treatmentYou are taxed on fourteen times the money you received. Writing the two 10,300 puts is itself a disposal: TCGA 1992 s.144(1) makes the grant of an option a disposal, and HMRC's CG55536 confirms the premium less costs is assessable as a gain arising when the option is written. So £1,930 is a chargeable gain in the tax year of the trade, not when the position closes, against a net credit of £139 — and the £1,785 paid for the long put is not deductible against it until that option closes or lapses. At 24% that is £463.20 of CGT on a £139 credit, so the everything-worked outcome is a £324.20 loss after tax; at 18% it is £347.40. Open it on 20 March and the gain falls in one tax year and the offsetting loss in the next, with no carry-back. If the shorts lapse, nothing further happens to the grantor and the grant-year gain stands. If they settle in the money, TCGA 1992 s.144A treats grant and cash settlement as one transaction, so that computation is revisited. The long put lapsing is a disposal under the traded-option exception in s.144(4) (CG12340), and the two shorts, being one series, pool into a single s.104 holding. SDRT: nil, because index options are cash settled — but the same 1×2 on ICE UK single-stock options delivers 1,000 shares per contract on assignment and carries SDRT at 0.5% of the strike consideration (STSM113030). No holding-period test applies: 18% or 24% turns only on unused basic-rate band above the £3,000 annual exempt amount. Wrapper: GIA only — HMRC's ISA-manager guidance excludes "futures or share options", and no SIPP administrator permits an uncovered written put. Two CGT events per cycle, three if the shorts settle in the money, and they can straddle 5 April.

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.

  • Initial: £13,410. The naked leg is £965 of proceeds + 15% of the £107,500 index value (£16,125) − the £4,500 out-of-the-money amount = £12,590, against a floor of £965 + £10,300 = £11,265. The bear put spread adds its £820 debit. The credit lands in cash, so buying power falls by £13,271.
  • Maintenance is the same calculation on current market value, so it moves from the first tick — upward, whenever the puts you sold get dearer.
  • After a 2 SD fall to 9,531 with 30 days left: £22,896, against a mark of −£4,779. After a 20% overnight gap to 8,600: £30,643, against a mark of −£13,806.
  • Liquidation begins when net liquidation value falls below maintenance, so after that gap you need £44,449. An account funded with £20,000 is left with £6,194 of equity against a £30,643 requirement — closed out by the broker, at that morning's prices.

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)IndexMark-to-marketHeld to expiryRequirementEquity needed
−20% gap8,600 (IV +18)−£13,806−£13,861£30,643£44,449
−2 SD9,531 (IV +7)−£4,779−£4,551£22,896£27,675
−1 SD10,141 (IV +3)−£512+£1,549£18,814£19,326
Unchanged10,750+£408+£139£12,863£12,455
+1 SD11,359 (IV −1)+£190+£139£11,158£10,968
+2 SD11,969 (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.

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The biggest ratio spread mistakeTrading for the peak. The diagram shows £3,139 at 10,300 and the mind treats that as the objective, but the peak exists at one index level on one morning, and the best mark this structure ever offers with 21 days still on it is £624 — a fifth of it. To collect the peak you must sit on the short strike into settlement: where gamma is largest, the requirement highest, and an overnight gap costs £10 a point with nothing underneath. Chasing it converts a £450 trade into a £13,861 one. The hard rule, no exceptions: 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.
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Ratio spread golden rules(1) Write three numbers on the ticket before the order: the credit, the requirement after a 20% gap, and the equity at which you are liquidated — £139, £30,643 and £44,449 here. (2) Never open it for a debit; 2 × the short premium must exceed the long premium or the structure has no reason to exist. (3) Breakeven at least 1 SD from spot, which is what rules out the call-side version on a FTSE chain. (4) Size on the requirement, not the credit: 5% of net liquidation value means £268,200 for one contract. (5) Take £450 and leave; close mechanically at 21 DTE, where the mark beats settlement anyway. (6) Log the £1,930 grant-date gain on the day you sell, because it is a chargeable gain for that tax year whatever happens next.

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.

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