How to Use a Backspread Options Strategy to Profit
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.
The Dead Zone
The drawback is that there’s a… Continue reading at StockNews.com
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