Backspread


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Backspread

An investment strategy in which an investor sells one or more option contracts and uses the proceeds to buy more option contracts than he/she sold. The options have the same underlying security or asset, and, ideally, the investor uses the premium(s) from the option(s) sold to finance the premiums for the options bought. If the underlying moves in the direction the trader wants, he/she can realize exceptional profits; however, even if the underlying moves away from the trader, he/she can make a small profit or at least break even because risk is limited to the premiums of the calls bought, which hopefully do not exceed the premium(s) of the option(s) sold. A backspread strategy may be used for calls or puts, but not both. See also: Put Ratio Backspread, Call Ratio Backspread.
References in periodicals archive ?
Digging deeper into the data, it appears we may have discovered a put ratio backspread - a bearish trading play - in the works.
The majority of this volume appears linked to what could have been a ratio backspread.
A ratio backspread is probably not the intended strategy, since twice as many of the in-the-money position were acquired.
The shares of McDonald's (NYSE:MCD) appear to be the focus of what appears to be a ratio backspread.
After a chapter on basic concepts and vocabulary, the workbook explains puts and calls, the covered call, and directional and nondirection dependent strategies, and looks at volatility, ratio spreads and backspreads, and current technology available to professional options traders.
The review also highlighted TradeStation's new direct-access options execution capabilities, noting, "When placing options orders, you can create any custom spread you might imagine, including a variety of ratio backspreads, synthetic longs and shorts, and vertical orders.