The front spread with puts, also known as a put ratio spread, is a strategy that profits when a stock declines moderately. Unlike a regular put spread, this trade sells more options than it buys, generating a credit and potential for enhanced profits. In this guide, we will explore how this sophisticated strategy works and when to use it.
What is a Front Spread with Puts?
A front spread with puts involves buying one put option at a higher strike and selling multiple put options at a lower strike. The typical ratio is 1:2, meaning you buy one put and sell two. This creates a position that profits from moderate declines and time decay.
The simple version: You buy one higher-strike put and sell two lower-strike puts. Your maximum profit occurs if the stock lands exactly at the lower strike at expiration. You have unlimited downside risk if the stock crashes.
How to Construct a Front Spread with Puts
The standard setup uses a 1:2 ratio:
- Buy 1 ATM or slightly OTM put option
- Sell 2 further OTM put options
- Same expiration date for all options
Example
Stock XYZ is trading at $50. You expect a moderate decline.
- Buy 1 $50 put for $3.00
- Sell 2 $45 puts for $1.75 each ($3.50 total)
- Net credit: $0.50 ($50)
Your maximum profit occurs if XYZ closes at exactly $45 at expiration.
Understanding the Payoff Profile
This strategy has a unique tent-shaped payoff:
If the Stock Falls to $45 (Maximum Profit)
- Long $50 put is worth $5
- Both short $45 puts expire worthless
- Net profit: $5 + $0.50 credit = $5.50 per share ($550)
If the Stock Stays at $50
- All options expire worthless
- You keep the $0.50 credit ($50 profit)
If the Stock Falls to $40
- Long $50 put is worth $10
- Both short $45 puts are worth $5 each ($10 total against you)
- Net result: $10 - $10 + $0.50 credit = $0.50 profit ($50)
If the Stock Crashes to $30
- Long $50 put is worth $20
- Both short $45 puts are worth $15 each ($30 total against you)
- Net loss: $20 - $30 + $0.50 credit = -$9.50 per share ($950 loss)
The Risk Profile
Understanding the risks is crucial for this strategy:
- Maximum profit: (Long strike - short strike) + credit = ($50 - $45) + $0.50 = $5.50
- Maximum loss: Unlimited below the lower breakeven
- Upper breakeven: If entered for credit, profit if stock stays above long strike
- Lower breakeven: Short strike - max profit = $45 - $5.50 = $39.50
When to Use a Front Spread with Puts
This strategy works best in specific conditions:
- Moderately bearish outlook: You expect a pullback, not a crash
- High implied volatility: Rich premiums make selling attractive
- Strong support levels: You believe the stock will not crash through support
- Range-bound markets: You expect the stock to drift lower then stabilize
Greeks and Time Decay
Understanding how the Greeks affect your position:
- Delta: Negative initially, becoming more negative as stock approaches short strikes
- Gamma: Negative, meaning big moves hurt you
- Theta: Positive as long as stock is above lower breakeven; time decay helps you
- Vega: Mixed; generally negative, meaning falling volatility helps
Managing the Position
Active management is essential with front spreads:
If the Stock Drops Toward Your Target
- Consider closing early to lock in profits near maximum gain
- Do not wait for expiration hoping for perfect execution
If the Stock Drops Too Far
- Close the position to limit losses
- Buy back one short put to convert to a regular put spread
- Roll the short puts to a lower strike if you still expect support
If the Stock Rallies
- Let the options expire worthless and keep the credit
- Close early if you want to redeploy capital
Adjustment Example
Stock has fallen from $50 to $42, approaching your danger zone:
- Buy back one $45 short put for $4.00
- You now have a regular $50/$45 put spread
- Maximum loss is now capped at $5 minus credits received
Front Spread vs Put Debit Spread
Comparing these bearish strategies:
- Cost: Front spread generates credit; debit spread costs money
- Max profit: Front spread has higher max profit potential
- Max loss: Front spread has unlimited risk; debit spread is capped
- Best for: Front spread for moderate declines; debit spread when you expect a big move
Choosing Strike Prices
Strike selection impacts your risk-reward significantly:
- Wider spread: Higher max profit but larger potential loss
- Narrower spread: Lower max profit but smaller potential loss
- Short strike selection: Place at strong support levels
- Long strike selection: Usually at or slightly below current price
Common Mistakes to Avoid
- Using in low IV environments: Selling cheap options reduces the credit received
- Ignoring unlimited risk: Always have a stop loss or adjustment plan
- No support analysis: Place short strikes above strong technical support
- Holding to expiration: Close or adjust before the danger zone
Monitor Your Front Spreads
Pro Trader Dashboard tracks complex multi-leg positions and alerts you when stocks approach your danger zones. See Greeks, P/L, and breakevens in real-time.
Summary
The front spread with puts is an advanced income strategy for moderately bearish traders. By buying one put and selling two at a lower strike, you create a position that profits from time decay and moderate declines. The maximum profit occurs when the stock lands exactly at the short strike. The key risk is unlimited loss potential if the stock crashes, so always have an adjustment plan and use technical support levels to guide your strike selection.
Want to explore related strategies? Check out our guide on put ratio backspreads or learn about credit spreads for defined-risk income strategies.