How to Use a Backspread Options Strategy to Profit

by Options Sensei

With market volatility, as measured by the “CBOE S&P Market Volatility Index (VXX)” has sunk back down to pre-teen levels of 12. While it can certainly stay low, this basically represents a floor in the price.

And sets up an attractive situation for employing a backspread strategy.

A backspread consists of all calls or all puts with the same expiration in which one sells a closer-to-the-money strike and buys a multiple number of contracts in a further out-of-the-money strike. The goal is to have as minimal an outlay or debit as possible while achieving the highest ratio of long option contracts to short.

I tend to use these on the put side, whether it be portfolio protection or bearish bets.

The goal of a backspread is to buy as many options as possible relative to the number sold for the lowest cost. A good rule of thumb would be to buy 3 contracts for every 1 sold for even money. Of course, the width between strike prices is one of the determining factors of what ratio can be accomplished.

Think about using them when a stock or ETF has enjoyed a remarkable rally.  When gold went parabolic the past few months one could portfolio established a low cost back spread in “SPDR Gold Trust (GLD – Get Rating)” which, after a few days, paid off handsomely.

While “Tesla (TSLA)” and “Beyond Meat (BYND)” still in their upward trajectory both are set up as good candidates for employing backspreads.

The Dead Zone

The drawback is that there’s a… Continue reading at StockNews.com

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