Backspread Options Trading Strategy
Backspread or reverse ratio spread options trading strategy is a limited loss unlimited profit multi-leg options trading strategy employed by options traders, when they think the price of underlying stock can raise or fall considerably with time. Backspread options trading strategy is just the reverse of ratio spread options trading strategy. Backspreads are of two types as call backspreads and put backspreads.
Call backspread options trading strategy is useful when the options trader predict a rally in price of underlying stock. He/she often employees a 2:1 ratio of long and short calls of same expiration date with different strike prices. Maximum loss occurs when the options expire on the long call strike price, i.e., when the short call options expire in-the-money. There is two no-profit no-loss situations (not considering the credit/loss involved in options setup) on breakout points of either side of long call strike price; defined by long call striker price +/- maximum loss points. Any expiration price increase over the upper breakout point will earn profit to the trader which increases with increase in price of underlying stock.
Put backspread options trading strategy is useful when the options trader predict a negative rally in price of underlying stock. He/she often employees a 1:2 ratio of long and short puts of same expiration date. The successful implementation of backspread options trading strategy requires sufficient trading experience, and it can’t be employed when price of underlying stock stays steady.
Call backspread options trading strategy is useful when the options trader predict a rally in price of underlying stock. He/she often employees a 2:1 ratio of long and short calls of same expiration date with different strike prices. Maximum loss occurs when the options expire on the long call strike price, i.e., when the short call options expire in-the-money. There is two no-profit no-loss situations (not considering the credit/loss involved in options setup) on breakout points of either side of long call strike price; defined by long call striker price +/- maximum loss points. Any expiration price increase over the upper breakout point will earn profit to the trader which increases with increase in price of underlying stock.
Put backspread options trading strategy is useful when the options trader predict a negative rally in price of underlying stock. He/she often employees a 1:2 ratio of long and short puts of same expiration date. The successful implementation of backspread options trading strategy requires sufficient trading experience, and it can’t be employed when price of underlying stock stays steady.
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posted by Daniel Pipitone at
4:13 AM
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