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.