Discussion in 'Options' started by HeHateMe, Apr 17, 2004.

  1. HeHateMe


    It seems to me that the major drawback with backspreads is if the stock slowly moves without getting to the long options. For example short one put at 50 and long two puts at 45. If the stock is hovering around 46 with not much time left, is there any adjustments you can make that would make sense? I realize that the most common action is to close the spread at a small profit or loss but I was wondering if there was another alternative.

  2. A couple points on backspreads. First, it's best to use intermediate term options. Otherwise, the scenario you described will be all too common. As a corollary point, imo, it's best to have a time stop that kicks in before the options are in the last 30-60 days to avoid getting killed by theta. And third, I wouldn't do a backspread unless you get a favorable skew. Those are tough to come by on the put side.

    Now with regard to your specific question, one adjustment that might make sense is converting it to a long butterfly. However, if the implied levels are low, as I suspect they would be in the slow drift scenario you described, the coversion might be pricey. On the other hand, you'd get theta to be working in your favor as opposed to against you. So it might be worth considering.
  3. HeHateMe


    Thanks HD, hadn't thought about converting to a butterfly before.
  4. One point to consider is that as far as equity options go, call backspreads are a better choice and cheaper due to the flat or reverse skew(if u are patient).