A Put Front Ratio Spread is a neutral to bearish strategy that is created by purchasing a put debit spread with an additional short put at the short strike of the debit spread. The strategy is generally placed for a net credit so that there is no upside risk.

Directional Assumption: Neutral to slightly bearish

Setup:
- Buy an ATM or OTM put option
- Sell two further OTM put options at a lower strike

Ideal Implied Volatility Environment : High

Max Profit: Distance between long strike and short strike + credit received

How to Calculate Breakeven(s): Short put strike - max profit potential

A Call Front Ratio Spread is a neutral to bullish strategy that is created by purchasing a call debit spread with an additional short call at the short strike of the debit spread. The strategy is generally placed for a net credit so that there is no downside risk.

Directional Assumption: Neutral to slightly bullish

Setup:
- Buy an ATM or OTM call option
- Sell two further OTM call options at a higher strike

Ideal Implied Volatility Environment : High

Max Profit: Distance between long strike and short strike + credit received

How to Calculate Breakeven(s): Short call strike + max profit potential

Our go to ratio-spread is a front-ratio spread. We normally do not route back-ratio spreads, which is where we are purchasing more options than we are selling, because this would be routed for a debit. We always prefer to collect premium and put ourselves in high probability situations. The beauty of this trade is that if we’re directionally wrong, it doesn’t matter if our spread expires OTM as long as we collect a credit - that will then be our profit. We route front-ratio spreads as a means to get into a long or short stock positon with a very beneficial breakeven point. We tend to use these strategies if we have a price target in mind for the underlying. We will usually place our short strike at that target, as that would yield max profit at expiration if the stock ends up there.

When do we close Ratio Spreads?
When the position reaches 25% to 50% of maximum profit potential.

When do we manage Ratio Spreads?
When the debit spread portion of the trade can be closed for near max profit, the debit spread portion can be sold while holding the additional short option. If the trader wants to extend duration on the position, the short option can be rolled to the next month.