BackSpreads vs regular Long Calls/Puts..... - futures io
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BackSpreads vs regular Long Calls/Puts.....

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BackSpreads vs regular Long Calls/Puts.....

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  #1 (permalink)
Posts: 232 since Sep 2010

So I need some more expierenced Options traders to please way in, and give me your take on if I should even explore Backspreads , and what the positives and negatives are .

The main reason I have just recently sought out the Backspread, was the fact that I am trying to get Long regular Calls and Puts on the higher priced stocks .... I.E. AMZN, NFLX, CMG, GOOG, etc...

I like the fact that you can enter into a Backspread , and get into the trade for virtually no cost ( Debit ) , and even at times, for a Credit
But what I found out in running some analysis in comparing the Backspread to a regular Long Call , against stocks like AMZN, GOOG, CMG, etc. was ..... that I had to change the spreads from the default ( $5 backspread spreads ) to around a $15 - $20 spread , just to be able to get into the trade for virtually " Free "

By having to put on such a wide spread , this leaves the Max Loss to a much bigger Loss that I am comfortable with trading ( even though True .... I could put a stop loss in place to cap myself from only losing an amount that I am comfortable with ).

Also, to put on a Backspread on this high dollar stocks at the default ( $5 ) spread ..... the Debit is anywhere from $15 - $20 , and this is Selling the 1 strike ITM and Buying 2 ATM strikes , with 45 days till expiration

So in comparing the costs as mentioned above ( $15 - $20 ) to put on a backspread in comparing it to buying the same Long Call ATM with 45 days to expiration ...... The Long ATM call costs more ( roughly $20 for AMZN for example )
So the Breakeven point before I would actually start to make a profit , is actually better ( Lower Breakeven Level ) to place the Backspread vs the outright Long Call

Just wanted to get other traders thoughts, ideas and perspectives on the formentioned comparisons please

I just don't want to miss out on trading this High priced stocks via Options, and so I am looking for an Option's strategy(s) that gives me Unlimited Profit potential , and with Limited Downside Loss

Thanks so much - Michael

Also, I have attached 2 screenshots , showing the Numbers behind placing a Backspread on AMZN

Attached Thumbnails
Click image for larger version

Name:	2015-07-08 18_14_13-AMZN - Charts - _TOTAL_ Paper@thinkorswim [build 1876.11].png
Views:	50
Size:	107.4 KB
ID:	186777   Click image for larger version

Name:	2015-07-08 18_15_06-AMZN - using Advanced Order and it's ....1st trgs Seq  and how to set a BE a.png
Views:	60
Size:	92.1 KB
ID:	186778  
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  #3 (permalink)
Boston, MA
Posts: 2 since Jun 2015
Thanks: 0 given, 1 received

I don't fully understand your example, but backspreads are an incredibly complicated way to get long/short delta. YOu have to take views on the speed of the delta (same as with a vanilla call) and you have to take a view on the implied volatility of the position after the move. Having the offsetting delta positions exacerbates the other risk factors: vega and skew.

If you want to get long, just buy stock or buy calls in a size you are comfortable with. Unless you have a clear view on where volatility will reset or a very specific view that the stock will rip (suppose you believe AMZN will go north of 500 or will selloff.

It's certainly not a structure to "get long while spending less money."

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  #4 (permalink)
Sydney, Australia
Experience: Intermediate
Platform: Sierra Chart, IRESS
Broker: IB, IQFeed
Trading: ES, SPI, ASX stocks, options
Posts: 399 since Jun 2015
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Don't fall in to the trap of thinking that options premiums makes a trade free. Many people think that and sell way too much or get too complicated and blow up. Just do it simple, during low vol buy a bull call spread and during high vol sell a bull put. Options pricing is usually pretty spot on with any discrepancy arbd away by mms, there is no free lunch. What u think is free will be completely offset by the risk taken in the long run.

A backspread looks good now but you need a hell of a move to make it profitable, if u think a big move will happen, then straight calls is more profitable. Trying to get in for free just says ur not confident.

Everything is a trade off with options and there is no edge

Straight calls -> get direction and time right
bull call Spreads -> Same as straight calls but you trade premium for having to also getting your target right
back spread -> Same as straight calls but you trade premium for having to get the minimum movement right

Then you haven't even considered the vol environment yet. Don't get too complicated with options unless you got a very specific scenario to play out (in terms of time, target, direction, minimum movement, vol). Unless you can accurately predict more than 2 of those at a time, don't bother.

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