*** "Back Ratio" Credit spread - maintenance question...

Discussion in 'Options' started by jeffa, Aug 18, 2011.

  1. jeffa

    jeffa

    Hi, I have a question about maintenance of a "Back Ratio" Credit spread.

    Basically this trade is the SALE (short) of the front-month ITM option and the PURCHASE (long) of 3 OTM options in a far-month (usually 3-4 months out). The trade sets up best, obviously, when there is a lot of volatility skew into the FRONT month.

    This is done in a 3:1 or 4:1 ratio – one short call – three long calls.

    I am putting these on only as a NET CREDIT to start, please see attachment "BRC Credit Spread ENTRY.jpg" so we can lock in a little profit down in the tail.

    But the problem is when I go to roll these the picture doesn't look so pretty, see attachment "BRC Credit Spread after ROLL.jpg" - this short was just rolled from AUG > SEPT.

    So a week or so before the front-month SHORT option expires, I would like to roll this out to the following month. If we don't get the big move in the stock I want to accomplish the following with the trade:

    a. turn it into a slight income generator w/ a net-credit roll of the short, and/or, b. re-structure the trade to try and lock in a gain across the board (until the long options expire). I would like to do this each month until the LONGS expire.

    I am probably missing something very obvious, but do you have a recommendation on the technique/trick to accomplish this?

    thx. Jeff A. :)
     
  2. jeffa

    jeffa

    here's the other attachment
     
  3. jeffa

    jeffa

    here is the other attachment......