I have been studying and SIM trading vertical spreads ( Bull Call and Bear Put spreads ) these past few weeks, as well as studying the various Greeks associated with Options , just trying to really educate my self on Options as a whole..
While doing this research, I stumble on an Option strategy " Call Ratio BackSpread " , and this strategy really got my attention.
For one thing, it's a Credit Spread, so you make money to put on the strategy and second, it was showing how, even if you think the stock is going to go up in price, but it actually drops / goes against you, that you can still make a profit, via the Net credit that you made, when you placed the trade !
Has anyone else used this strategy or know much about it ?
And what would be the main benefit(s) to placing a Call Ratio BackSpread vs a Bull Call spread , if you think the stock is going to go up in price?
With the Call Ratio BackSpread , you are getting paid to place the trade and with the Bull Call spread, you have to pay to place it , just curious
Thanks much everyone, I really appreciate the help - Michael
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Backspreads are great when the underlying has a big move and the long options go in the money. When that happens you can make a lot more money than a simple debit vertical. The problem is when the underlying has a lesser move that puts the short option in the money but leaves the long options out of the money, then the trade loses money.
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Being a back spreader in the option market needs some more knowledge according to your basics. Beside the possibility to leg into any back spread, you have to be clear about the ways you can convert any call or put back spread into any other option strategies. Here most fail, as there is not much published in the net nor written about it in most books. A mentor is needed, as exactly those specific knowledge how to convert and when to convert makes the different between the long term successful back spreaders and the once which most of the time end in the hole of any of such back spreads. (If you do not now what is meant by the "Hole", then have once a look at the option strategy analyzing picture of any back spread and you know what I mean: http://www.theoptionsguide.com/call-backspread.aspx / http://www.theoptionsguide.com/put-backspread.aspx) Lost some money at the begin with back spreads until I got such a mentor who showed me what is not written in the books. Good luck.
Last edited by Stan Dan; April 5th, 2014 at 02:02 PM.
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- Can be directionally neutral
- Unlimited profit potential
- Ideal in times of low volatility
- Very capital intensive. You don't have to 'pay' a lot/any money to enter the position, but you do need to have enough capital on hand at all times in case the position goes against you. For example, if I sold $10 calls and bought $14 calls, I need to have $400 of unused capital in my account for each call that I am short. That is because the trade could go against me and I lose up to $400 for each sold call.
- Not efficient in times of high volatility
- If the trade takes a long time to develop, you run the risk of your short calls being exercised as time premium evaporates.
Bull Call Spread Benefits
- Ideal in times of high volatility
- Chance of short calls being exercised before position is near max profit is generally low.
- Not efficient in times of low volatility
- Limited profit potential
- Directionally biased
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