Back Spreads

Backspreads

This is a good strategy to use when you anticipate a large price move in a market. This strategy is the exact opposite of Strategy #5, Call ratio spreads. When you open a backspread position, you sell one or more options and at the same time you buy a larger number of options on the same underlying asset that are further out-of-the-money (and less expensive).

The options you sell pay for the larger number of (cheaper) options you buy.

Here's how it works:

	If you feel the direction of the move will be upward, you might sell one at-the-money call option and buy two out-of-the-money call options. You might, for instance, sell one 100 call option and buy two 110 call options.
	Conversely, if you feel the direction of the move will be downward, you might sell one at-the-money put option and buy two out-of-the-money put options.
	You can use other ratios as well. For instance, you might sell two and buy three, etc.
	Usually, you will want to do this trade for a credit. That is, the premium you collect for selling the option(s) will be more than the cost of the options you purchase.
	If you can't do it for a credit, try to get in for no cost or a very minimal cost.
	If a large move occurs in the direction you anticipated, you can make a good profit because you are long more options than you are short.
	The only way you can lose with this position is if the price of the underlying asset is between your two strike prices when the options expire. In that case, the option(s) you sold would be in-the-money while the options you purchased would expire worthless.
	When you are in a backspread, if the price of the underlying asset moves between your two strike prices and stays there, close out the trade before the options expire.