Ratio Backspread
Backspread is an option that can be an excellent strategy under the right market conditions. In
options terminology, a multiple option strategy where you are long more options than short is called a backspread. It is also be called a “ratio backspread” since there is a ratio of long to short options. You might use this strategy in
options trading if you see potential for significant movement in a certain direction, but don't want to lose money if the market moves in the opposite direction. Another scenario would be if implied volatility in the out-of-the-money options is very low, but you expect volatility to rise sharply when the move begins. It may be during a quiet market or at price extremes, conditions which can sometimes lead to another major move, when option implied volatility reaches very low levels. The backspread is a trade that can often be initiated with no initial premium cost, has little or no risk if the market moves against you, has a defined loss limit and has unlimited profit potential. If initiated at a premium credit, the backspread can even make profits if the market moves opposite the expected direction. Besides the profit potential from a directional move in the underlying futures, the backspread can benefit from an expected increase in option implied volatility that often accompanies a large market move. Since these trades are often initiated when option implied volatility is low, a rise in option implied volatility can significantly add to profit potential.
<< Home