Ratio Spread
A put ratio spread buys one put and sells two at a lower strike, on one expiry. One sold put is covered by the bought one; the other is not, so below the lower breakeven the structure loses £10 a point on the FTSE 100 contract, with no floor until the index reaches zero. It gives up that floor and ties up a large margin requirement for a small credit. Skew, the higher implied volatility of lower strikes, lets it open for that credit; it keeps the credit anywhere above the bought strike and pays most at the sold strike. It is designed for a modest, slow fall, with a level named in advance below which that view is wrong.
This page assumes the reader has met the bear put spread, which is the covered half of this structure, and the Level 3 material on uncovered margin. Its mirror image, the backspread, sells what this page buys and buys what it sells. The FTSE 100 is used as a model underlying; nothing here is a view on the index.
One put bought, two sold: which part is uncovered
Split that way, the risk has two separate sources. The bear put spread half can lose no more than it cost. The uncovered half is a written 10,300 put, and that single contract is where the loss below the breakeven comes from: £99,840.10 if the index settled at zero, which is the arithmetic ceiling rather than a forecast, and £4,840.10 at 9,500. The FTSE 100 contract is European and settles in cash against the exchange delivery settlement price (EDSP), so there is no early assignment and no delivery of anything; the BP version below shows what changes when there is.
Why it opens for a credit: skew at 10,600 and 10,300
On a flat volatility surface this ratio would cost money. It opens for a credit only because the FTSE 100's lower strikes carry higher implied volatility than those near the index, so each 10,300 put is dearer, relative to its distance from the money, than the 10,600 put bought against it. The library's surface gives 14.56% at 10,600 and 15.71% at 10,300. The chart shows that surface, the same surface with half its slope, and a flat 14%; the legend gives what the same 1 × 2 opens for on each.
The ratio's credit is a price for skew, not a reward for a view on direction. At three-quarters of the library's slope the credit falls to £73.01; at half the slope it has become a debit, and with no skew at all the structure costs £187.14 for the same open-ended tail. The example's 14% at-the-money level also sits near the bottom of the 60-day FTSE 100 Implied Volatility Index's range over the year to 30 June 2026, 13.54 to 25.59 with an average of 17.24 (FTSE Russell factsheet, checked 27 September 2026). With every strike 3.24 points higher, the same model ratio opens for 52.22 points (£522.16); two points lower, it costs 2.22 points. How skew arises, and how a reader can see it on a chain, is on the implied volatility page.
The call side works the other way. Built on calls at the same distances above the index (buy the 10,900 call at 172.0, IV 13.45%; sell two 11,200 calls at 66.5, IV 12.36%), the mirror-image ratio opens for a 39.0-point debit (£390.00), because the far strike is now the cheaper one. It would pay that debit for an uncovered short call above 11,500 as well. On this surface the upside mirror is the call backspread, which collects the same 39.0 points.
Where the sold strike sits: four widths against the same bought put
Keeping the 10,600 put and moving the two sold puts changes every number that matters at once. The table prices four choices on the same chain; each row's requirement uses the strategy-based schedule explained below.
Probabilities are model probabilities (risk-neutral, lognormal, taken from the skew surface), not forecasts. SD distances use the 14% at-the-money volatility over 60 days.
Moving the sold strike closer, to 10,400, raises the credit from 16.5 to 60.5 points, and pays for it by pulling the breakeven up to 10,139.5, only 1.03 standard deviations below the index, where the model gives a 14.9% probability of settling. Moving it further away, to 10,200 or 10,100, lowers the breakeven and the loss at −2 SD, but the structure then opens for a debit: it pays 20.5 or 50.5 points to hold an uncovered put. With the bought strike at 10,600, only the 10,400 and 10,300 widths open for a credit on this surface. The worked example takes 10,300, the widest width that still does.
The worked example: a 10,600/10,300 put ratio on Monday 17 August 2026
The breakeven is a 7.1% fall, 1.30 standard deviations on the model; the one-standard-deviation range for 16 October is 10,156.8 to 11,377.8. On the skew surface the model probabilities (risk-neutral, lognormal) are 65.3% that the index settles above 10,600 and the credit is all that is kept, 14.4% that it settles between 10,300 and 10,600, and 10.8% that it settles below the breakeven.
Open this worked example in the strategy builder (the builder takes the two fills, solves each leg's volatility from them and uses the model's 3.05% yield, so its figures track this page's; its Greeks can differ by a few pence because it prices from the rounded fills).
Settlement on 16 October, and the mark on the way there
The solid line is the settlement payoff: flat at the credit above 10,600, a ramp up to the peak at 10,300, then a straight fall of £10 a point with nothing to stop it. The two curves are the same position valued before expiry with each strike's volatility unchanged. Neither comes near the peak. With 30 days left the best the position shows anywhere is £440, near 10,640; at 10,300 it shows £114. The peak is a settlement-day value at one index level, and the curves show how late it forms.
What a fall does to the mark and to the requirement
For this family the stress test is the lead section, because the payoff diagram hides the part of the risk that forces positions closed. The rows below move the index instantly on 17 August, with the stated parallel shift added to every strike's volatility (sticky-strike, as on every FTSE page), and read four numbers: the mark, the settlement result if the index then stayed there, the strategy-based requirement after the move, and the equity an account would have needed at entry to still cover that requirement after the loss. The method is set out on the Level 3 page.
Read across the adverse rows and the requirement rises as the account loses, because it is built from 15% of the index level plus the market value of the uncovered put, and that put gets dearer on exactly the days the position is losing. Between entry and the gap row the requirement rises by £17,670 while the mark falls by £14,477.26. On the upside the requirement barely falls: £11,109 is still tied up at +2 SD against a result capped at the credit. One-day falls of that size have happened; they are listed in the Level 3 page's gap history, and what a broker does when equity falls through the requirement is in its margin spiral section.
The −1 SD row carries the lesson particular to a ratio. An ordinary 5.5% fall marks the position at −£1,824.46 straight away, while the same index level at settlement would pay £1,727.90. The screen shows a loss at a level the payoff diagram calls profitable, and the gap between the two closes only on the last day, when gamma at the sold strike is largest.
Strategy-based against scan-based: two ways to price the requirement
Strategy-based decomposition. A rule-based schedule splits the structure into the 10,600/10,300 bear put spread, whose £805.00 debit is paid in full, and one uncovered 10,300 put. The figures here use the Cboe strategy-based rule for an uncovered broad-based index option, a published schedule that makes the arithmetic checkable (Cboe strategy-based margin, checked 26 September 2026): the option's value plus 15% of the index value, less any out-of-the-money amount, with a floor of the option's value plus 10% of the strike. Here that is £970 + £16,125 − £4,500 = £12,595.00, against a floor of £11,270.00, so the 15% rule binds. With the spread's debit the total is £13,400.00, 81 times the credit. Brokers set their own requirements for ICE contracts, so this is a reference figure, not any broker's.
A scan-based model. Risk-based models, of the kind clearing houses use, instead revalue the whole position across a grid of index moves and volatility shifts and charge the worst loss. The table runs a simple grid of that kind (index moves up to ±15%, volatility 4 points up or down on every strike, instant). The grid's parameters are this page's illustration, not ICE Clear Europe's.
The worst cell is −£8,700.63 at a 15% fall with volatility up, so a scan of this width would ask for about that amount, against the £13,400.00 of the strategy-based rule. The scan asks for less because it counts the bought 10,600 put, which pays in every down scenario; the fixed 15% rule ignores it. What the two share is the direction of travel. After a fall both rise, and whichever model the broker uses, its order preview is the figure that governs. The spread margin and uncovered margin sections set out both schedules in general.
Four paths to 16 October, with the worked plan's conventions firing first
The worked plan uses two teaching conventions, set out with their origin and evidence on the methods page: it closes if the index trades below the 10,300 sold strike with more than 21 days left, and it closes at 21 days to expiry, Friday 25 September, whatever the mark. Neither is a rule. Each path shows the convention firing first and then what holding to settlement would have given. Closing results include commission and half the quoted spread both ways.
Path B is the easiest to misread, because nothing about it looks alarming. An unremarkable drift puts the index just under the sold strike with a month to go, the screen shows a small loss, the settlement column shows a large profit, and the peak on the diagram is 150 points away. The conventions exist because a similar distance in the other direction, 166.5 points, reaches the breakeven, and past it the loss and the requirement both grow with every point. Rolling the sold puts lower for a debit is also possible; the mechanics and what a roll does to the tax are on the rolling page.
Greeks: paid to wait, short volatility, and longer as the index falls
The entry mark is £1.99 because the fills sit 0.2 points better than the model values. Units follow the position Greeks conventions: delta in pounds per index point, gamma as the change in that delta for a 10-point move.
At entry the position collects +£14.59 a day and is short £100.74 of vega a volatility point: time is on its side and a rise in volatility is not. The −1 SD column is the one that decides the trade. After an ordinary fall with volatility 3 points higher, delta has gone from +£0.83 to +£3.94 a point and vega from −£100.74 to −£183.45: the position has grown in the direction it is losing, and become more exposed to the volatility rise that usually comes with a fall. The 7-day column shows the other side. At an unchanged index with a week left, theta and vega have turned (−£28.78 a day, +£29.38 a point), because the bought 10,600 put is now the option closest to the money.
Five shapes from two strikes: the put ratio and its relatives
The ratio, the backspread and the butterflies are built from the same 10,600 and 10,300 puts, so they can be compared on one chain. This table is the family's reference; the backspread and broken-wing butterfly pages link here rather than repeat it. The 10,000 and 9,900 puts are filled at 51.0 (model 51.11, IV 16.89%) and 41.0 (model 41.08, IV 17.29%).
"Most it can lose" for the ratio, and "most it can make" for the backspread, are the values at an index of zero. A schedule that charges a spread its maximum potential loss at the strikes, as FINRA Rule 4210(f)(2)(H)(i) does for US accounts (FINRA Rule 4210, checked 27 September 2026), would ask only £1,000 beyond the broken-wing butterfly's paid debit; the order preview governs.
The table puts names to things that are easy to confuse. Buying the 10,000 put turns the ratio into a symmetric put butterfly (both wings 300 points), and the tail disappears for the £510.00 that put costs, leaving a £345.00 debit in total. Buying the 9,900 put instead gives a genuinely broken-wing butterfly: £100.00 cheaper than the symmetric one, for £1,000 of tail below 9,900. On the put side, skew makes that a poor exchange: 10% of the tail accepted at these strikes, with the body 450 points below the index; the broken-wing butterfly page's nearer put version (10,700 / 2 × 10,500 / 10,200) saves 18.5%, and its call version 22.0%. The backspread row is the ratio with every sign reversed, less the costs. Every row except the ratio has a requirement that stays fixed wherever the index goes; the ratio's grows in a fall, as the stress table above shows.
The same shape on BP shares: a debit, and 2,000 shares on assignment
On a single stock the ratio behaves differently in two ways, and BP shows both. The inputs are the model sheet's: BP at 530p on 17 August 2026 (a model level; BP closed at 519.6p that day), 26% implied volatility at every strike, no dividend before the 12 November ex-date, American puts priced on a 200/201-step binomial tree, ICE standard contracts of 1,000 shares with a 0.25p tick, and £1.40 commission a contract. BP is used as a model underlying; this is not a view on BP.
So on a single stock the uncovered put ends as a share position that needs cash or margin to hold, and it can arrive before expiry. On the FTSE 100 contract the same leg settles in cash on one date. The tax page's assignment table shows how each premium joins the share computation.
UK tax: three legs that net off in 2026/27, and a February version that splits
The two written puts are one grant, a disposal on 17 August (TCGA 1992 s144(1)); the bought put is disposed of when it lapses or settles. Ending on 16 October, all three results fall in 2026/27 and net off; other gains are assumed to use the £3,000 exempt amount.
So the case where everything works is a gain of £3,159.90, with £758.38 of tax at 24%. The trap needs 5 April in the middle. Opened on Monday 15 February 2027 (February rather than the library's usual March, so that the 60-day life ends on the Friday 16 April expiry) on the April series (60 days, same inputs and premiums) and settled above 10,600, the £1,936.60 grant gain is taxed in 2026/27 (£348.59 at 18% or £464.78 at 24%) while the £1,776.70 loss on the bought put falls on 16 April, in 2027/28: relief deferred, and lost only if never used. Settled below 10,300, both legs are dated at settlement, in 2027/28. HMRC gives no worked example; the reading follows s144A(2) (tax page). Results go in the SA108's other property section; an ISA cannot hold options, and no UK SIPP administrator permitting them was found (checked 26 September 2026; wrappers).
Costs in pounds, the contract, and the permission it needs
Costs. Commission is £5.10 to open three contracts at £1.70 each; there is none at cash settlement, and another £5.10 if the structure is closed before. Half an illustrative 2-point quoted spread costs £10 a contract each way, £30.00 to open and the same to close: £60 round trip, 36.4% of the £165.00 credit. On a structure paid by a small credit, the spread is the cost that matters. There is no SDRT on a cash-settled index option; on the BP version it is £48.00 at assignment.
Contract and access. ICE FTSE 100 options (ESX) are £10 a point, European, cash-settled on the EDSP intraday auction on the third Friday, with trading in the expiring series stopping after about 10:15 that morning (FTSE 100 contracts, EDSP). A one-tenth-size version exists only as the Mini FTSE 100 daily options (8LX, £1 a point), whose front five daily expiries plus the third Friday cannot carry a 60-day ratio; ICE lists them, but whether a broker offers them and quotes a two-way price has to be checked. Contract sizes across the library are on the basics page. A spread bet or CFD on the index can reproduce the shape, with different tax: three ways to hold it.
Permission. At IBKR the structure needs a margin account: its cash accounts allow covered calls and fully cash-secured puts, and spreads need margin. IBKR's permission list has no entry for a ratio as such; taken apart, the extra written put is a "short put", Options Level 3, alongside short put spreads, while a call ratio's extra written call would be a "short naked call", Level 4 (IBKR options trading permissions, checked 26 September 2026). Portfolio margin, which IBKR offers from USD 110,000 of net liquidation value, is an optional way of computing the requirement, not the permission for uncovered writing (accounts and permissions).