Backspread questions

Discussion in 'Options' started by jimmyjazz, Apr 9, 2018.

  1. Can anyone recommend books or articles that delve into the theory behind backspreads? I am specifically looking to learn about how they price & perform against simple long option strategies, as well as the tradeoffs involved in selecting strikes, ratios, and expiry. Thanks.
     
  2. spindr0

    spindr0

    I don't know if there's much 'secret sauce involved in a backspread. It's a limited risk strategy comprised of long call(s) added to a bullish spread or long put(s) added to a bearish spread with a maximum loss at the long strike.

    You want to establish it for a credit so that both sides are potentially profitable and perhaps be delta neutral so that you can make money to the either side from a quick move by the underlying. The key ingredient is an underlying that is likely to move soon since without that, you die a slow death b/t strikes due to theta decay.

    I think that you would get more out of a good charting program than the few page description of backspreads in an option book, particularly if it offers time slices that show P&L over equal time periods between now and expiration. That would give you a feel for position performance over time.

    About the only other ingredient to be concerned about would be if the short leg gets ITM and approaches parity. Then, early assignment becomes a possibility.

    It might also be worthwhile to take a look at diagonal backspreads just before earnings announcements. If playing short term, if the near week IV has really inflated, you might benefit if its post EA contraction reasonably offsets far week contraction and you get salvage value on the distant week. The trade off will be salvage value for initial credit, likely a debit.
     
    Last edited: Apr 10, 2018
  3. Didn't you mean "a long call(s) added to a bearish spread"?
     
  4. spindr0

    spindr0

    Yep, thanks for the catch.