Options Terminology: Backspread

An options backspread is a ratio strategy with call or put options. Either the long or short side will have more weight.

For instance, a call ratio backspread could be to sell the lower strike price and purchase a greater number of higher strike price calls. This gives an unlimited profit potential with a limited risk. This is a bullish strategy that will receive its profit potential with a great upside move. The upside move must be bigger to experience its profit potential depending on the gap between the purchased and written calls.

The backspread can be a ratio of puts as well as calls. Normally, the ratio is between 2:1 and 3:1. This means for every short position put on the long side there will be two to three times the amount of short positions.

The backspread is an ideal strategy for a bullish investor who predicts a very large move to be imminent. As opposed to a bull call spread or a bear put spread, this backspread can experience its profit potential earlier and more abundantly. Be certain whenever you try the backspread that you never collect a net credit or else your position is an inverted ratio backspread, which has unlimited risk.

blog comments powered by Disqus
Scottrade