Put Ratio Backspread: How to Profit From a Sharp Fall in Nifty

Most traders who turn bearish on the Nifty do the obvious thing: buy a put. It works if the fall comes quickly. If it doesn’t, the premium bleeds away and a correct view still ends in a loss. The put ratio backspread is a way around part of that problem. You sell one in-the-money put, buy two cheaper out-of-the-money puts, and set the whole thing up for a small net credit. A sharp fall pays well, a rally costs you nothing and even leaves the credit in your pocket. The catch is a slow, drifting decline, which is exactly where this trade hurts the most.

We’ll walk through how the legs fit together, rework the classic Zerodha Varsity example step by step, build a fresh hypothetical trade on round numbers, and then look at the parts people tend to skip: the loss zone, volatility and when to stay away.

How a put ratio backspread is built

The structure has three option legs on the same underlying and the same expiry. According to Zerodha Varsity’s chapter on the put ratio back spread, the classic version is:

• Sell one in-the-money (ITM) put, the higher strike.
• Buy two out-of-the-money (OTM) puts, the lower strike.

The 2:1 ratio is the point. For every put you sell, you buy two. Scale it up and it stays 2:1, so selling two lots means buying four. Varsity also says the trade is usually put on for a net credit, and that you should not initiate it if it costs you money upfront.

Why a credit? The ITM put you sell is expensive because it already has intrinsic value. The two OTM puts you buy are cheap because they have none. When the one expensive premium is bigger than the two cheap ones combined, money comes into your account on day one.

It helps to see this as the mirror image of a regular ratio spread. Wikipedia’s entry on the ratio spread describes the typical front ratio as selling twice as many contracts as you buy. A backspread flips that around: you are net long options, not net short. We covered the front version, with its naked leg risk, in our piece on the ratio spread options strategy. With the backspread, the extra leg is a long put, so the unlimited exposure sits in your favour on the downside.

A put ratio backspread is not really a bet that the market will fall. It is a bet that the market will fall hard, and soon. A gentle slide is the worst result you can get.

The Varsity example, leg by leg

Varsity uses an older Nifty setup to explain the trade. The levels are from that teaching example, not today’s market, but the arithmetic is what matters. Nifty spot is at 7506 and the trader expects it to drop towards 7000 by expiry. The trade:

• Sell one lot of the 7500 PE (ITM) and collect a premium of Rs 134.
• Buy two lots of the 7200 PE (OTM) at Rs 46 each, so Rs 92 goes out.
• Net credit = 134 − 92 = Rs 42.

Now look at what happens at different expiry levels, using Varsity’s own figures (all values are per unit of the underlying):

Read the table from top to bottom and the shape of the trade jumps out. Above 7500, both puts die and you keep the Rs 42 credit. Between 7500 and 7200, the short put starts losing money while the long puts are still worthless, so the position slides into the red. At 7200, the lower strike, the damage peaks at Rs 258. Below that, the two long puts gain twice as fast as the one short put loses, and the position climbs back through breakeven at 6942 and keeps going.

One thing worth pausing on. The trader’s own target of 7000 isn’t enough here. Run the numbers at 7000: the short put loses 134 − 500 = −366, the two long puts are worth 400 against 92 paid, so +308, and the trade still shows a loss of Rs 58. The lower breakeven is 6942. Being right on direction was not enough. You needed to be right on the size of the move too.

The formulas you actually need

Varsity generalises the levels like this:

• Spread = higher strike − lower strike (7500 − 7200 = 300)
• Net credit = premium received on the higher strike − 2 × premium paid on the lower strike (134 − 92 = 42)
• Maximum loss = spread − net credit (300 − 42 = 258), and it occurs at the lower strike
• Lower breakeven = lower strike − maximum loss (7200 − 258 = 6942)
• Upper breakeven = lower strike + maximum loss (7200 + 258 = 7458)
• Payoff if the market rises = net credit

A quick sanity check on that upper breakeven: lower strike plus (spread minus credit) is the same thing as higher strike minus credit. So 7500 − 42 also gives 7458. We find the second form easier to remember, because it says plainly that the short put can lose up to the credit you collected before the trade turns negative.

A fresh worked example on round numbers

Let’s build one from scratch so the logic sticks. Every number below is hypothetical, chosen for easy arithmetic. These are not live quotes.

Suppose an index is at 24,000 and you think a sharp sell-off is coming before expiry. You:

• Sell one 24,000 PE at Rs 210.
• Buy two 23,600 PE at Rs 85 each, paying Rs 170.

Net credit is 210 − 170 = Rs 40. The spread is 400 points, so the maximum loss is 400 − 40 = Rs 360, sitting at 23,600. The upper breakeven is 24,000 − 40 = 23,960. The lower breakeven is 23,600 − 360 = 23,240.

Now the scenarios, again per unit:

• Index closes at 25,000. Every put expires worthless. You keep Rs 40. A wrong view, and you still made a little.
• Index closes at 23,800. The short 24,000 PE is worth 200, so that leg is 210 − 200 = +10. The long 23,600 puts are worthless, so that’s −170. Net: −160.
• Index closes at 23,600. The short put is worth 400, so that leg is −190. The long puts lose 170. Net: −360, the worst case.
• Index closes at 23,240. The short put is worth 760, so that leg is −550. Each long put is worth 360, so two of them are worth 720, and after the 170 paid that leg is +550. Net: zero.
• Index closes at 22,800. The short put is worth 1,200, so that leg is −990. Each long put is worth 800, so 1,600 − 170 = +1,430. Net: +440.

Notice the pattern below the lower breakeven. Every further point the index falls adds roughly one point to the profit, because you are long two puts and short one. That is the “unlimited” downside profit Varsity talks about. In practice it is capped only by the index going to zero, which is not a scenario anyone should plan around. In our example, the trade only starts paying once the index falls more than 760 points, about 3.2% below 24,000, before expiry.

To turn these into rupees, multiply by the contract’s lot size and the number of lots. Check the current lot size on the exchange before you size anything, since it changes from time to time.

Where the trade hurts: the slow drift

The loss zone runs from the upper breakeven down to the lower breakeven, with the deepest point exactly at the lower strike. In our example that is a band of 720 points, from 23,960 down to 23,240.

Think about what kind of market lands you there. Not a rally. Not a crash. A grind lower, the kind where the index loses a few dozen points a day, nothing dramatic, and drifts into your lower strike right at expiry. That’s the outcome that does the most damage, and it isn’t a rare one.

The rally is your friend here, the crash is your best friend, and the slow grind into the lower strike is the one outcome you have to plan for.

Some practical ways traders handle it:

• Size for the maximum loss, not the dream payoff. If 360 points times your lot size would hurt, the position is too big. Our guide to risk management in trading covers how to set that limit before entry.
• Decide in advance what you’ll do if the index parks near the lower strike with a few days to go. Exiting early at a smaller loss is often better than hoping for a last-day crash.
• Don’t confuse this with a hedge. If you hold a stock portfolio and the market drifts 2% lower, this structure can lose money at the same time as your holdings do.

Delta, strike choice and volatility

Varsity works out the position delta for its example. The 7500 PE has a delta of −0.55, which becomes +0.55 because it is sold. Each 7200 PE has a delta of −0.29, and you hold two. Add them up and the position delta is −0.03. That is almost flat at entry, but negative, which tells you the trade leans towards making money on a fall. The directional punch only builds as the market drops and the long puts gain delta.

On strike selection, Varsity’s advice is to stick with an ITM strike for the sold put and an OTM strike for the bought puts, and to make sure the whole thing goes on for a net credit.

Volatility is where timing comes in. Varsity’s sensitivity check shows that with around 30 days to expiry, a rise in volatility from 15% to 30% moved the strategy payoff from −57 to +10. With about 15 days left, the same rise moved it from −77 to −47. Close to expiry, volatility barely mattered and direction was everything. The takeaway is simple: early in the series, a volatility spike helps you because you are net long options. That’s also why Varsity says it would hesitate to deploy the trade at the start of a series if volatility is already unusually high, because you’d be buying the extra put at an inflated price.

If implied volatility is a fuzzy idea for you, our explainer on implied volatility vs historical volatility shows how to tell whether options are cheap or expensive before you put on a trade like this.

Put ratio backspread vs simply buying a put

So why not just buy a put? Here’s how the two compare in plain terms:

• If the market rallies: a long put loses its whole premium. The backspread keeps its net credit.
• If the market falls a little: a long put may make a modest gain if the fall clears its strike and premium. The backspread can be at its worst loss.
• If the market crashes: both make money. The backspread starts from behind because of the loss zone, but its two long puts keep adding once it clears the lower breakeven.
• Cost at entry: a long put is a debit. The backspread, done properly, is a credit, though your broker will block margin for the short leg.

That margin point matters for small accounts. You are short an ITM option, so expect a margin block well above the premium numbers in these examples. Check it in your broker’s margin calculator before placing the order.

When a put ratio backspread makes sense

Put together, the conditions that suit this trade look something like this:

• You expect a large, fast fall, not a mild correction. A known event risk, a breakdown below major support or a stretched market can all prompt that kind of view.
• Implied volatility is not already extreme, so the two puts you buy are reasonably priced.
• There is enough time for the move to happen, but you have a plan for the final days if it hasn’t.
• You can get the trade on for a net credit at sensible strikes.

If you only expect a small decline, a bear put spread or a plain long put usually fits better. If you have no directional view and just expect a big move, a long straddle is the more honest trade.

Common mistakes

• Breaking the ratio. One short against three longs, or two shorts against three longs, is a different trade with a different payoff. Keep it 2:1.
• Paying a debit. If the two OTM puts cost more than the ITM put brings in, the upside protection vanishes and you lose on a rally too.
• Picking strikes too far apart. A wider spread means a bigger maximum loss and a lower breakeven further away. It looks cheap until the market drifts into the gap.
• Legging in carelessly. Selling the ITM put first and waiting to buy the OTM puts leaves you short a put on its own for a while. Place the legs together.
• Forgetting costs. Three legs means three sets of brokerage, taxes and slippage, which eat into a credit as small as Rs 40.

The short version

The put ratio backspread sells one ITM put and buys two OTM puts, usually for a small credit. It wins on a rally (a little), wins big on a crash, and loses most when the index settles at the lower strike on expiry day. Work out the maximum loss and both breakevens before you trade, size the position so that maximum loss is bearable, and only reach for it when you genuinely expect a sharp fall rather than a slow slide.

Disclaimer: This article is for education and information only. It is not investment advice or a recommendation to buy or sell any security or derivative. The worked examples use hypothetical numbers or historical teaching examples, not live market prices. Options trading carries a high risk of loss; consult a SEBI-registered adviser before making investment decisions.