Backspread is when you buy more than you sell (unlimited reward). Ratio is when you sell more than you buy (unlimited risk). In general you open them delta neutral.
It's delta AND gamma neutral! It's a delta/gamma neutral spread. If you use those numbers I gave you above (giving that you would fiddle with the IV's until it equals those prices) and derived the greeks from them, you would see their gammas completely cancel out and and the shorted stock took care of the remainder of the delta, leaving it 0 as well I did my honors symposium project on delta/gamma neutral spreads. I made this calculator if anyone wants to check it out. It'll calculate everything you need to know about the spread from a minimal amount of info. Best viewed in 1024x768, this way you can see the whole calculator in 1 screen. If you download it, please let me know what you think.
I don't plan on putting any trades on the table like this for a while. Although the net debit is relatively small the margin is a lot, lot more, more than I could afford.
By the way, I'm 20 years old now, when I said that it was my project, it's my current project, I'm presenting it in late April.
My question was more general. Before you open a trade you have to devise a trading plan: what you'll do (adjust, get out, add / reduce size, etc.) in each of the possibilities that might arise over your trade's life. Neutrality exists for only a brief moment.
ahhhhhh ok, let me explain. Of course, the best time to do this is during a non-volatile time of the market (not earnings season, not a "red hot" stock with news that sends it bouncing everyday). I have found that between 31 days till exp. and about 15 days till exp. the greeks, with respect time time only, in this spread, hold a fairly stable ratio to one another. Time is not the only factor in this equation, we must look at the underlying price movement. As the stock price changes so will the gammas, It would take a fairly large move to turn a very good spread (one you would want to be in) into an unprofitable one though. But if your greeks do get too far off their original marks you re-calculate it and see if it's still as profitable as you like, then adjust or liquidate. Of course if I had this position on, I'd have it monitored to alert me when changes are occurring. If you're theta is in a better position after the large move, you'll want to scalp the gamma daily yourself top keep neutrality instead of adjusting. Because these spreads often have large negative net vegas, you want to keep a very close eye on the IV's.
If it went to $55 with say 10 days till exp, after holding the spread for a while, we'd have the following. - 11,635 from the 60's, which are now pretty much worthless. + $3,567 sale of the 65's, they are now worthless. + $13,330 from the short sale So we would have gained $5,262, on paper. Conversely if the stock was at $65 with 10 days till exp, we'd have. the 60's are now $5.08 from $1.79 The 65's are now $1.10 from .29 the Loss on the short stock is 9462 so.... 60's: +$21,385 65's: -$9963 stock: -$9,462 so.... We'd have a paper profit of $1,960