Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

9 Weeks to Better Options Trading: Back Spreads

By

Veteran options trader Steve Smith breaks down the back spread.

PrintPRINT
Editor's note: To help investors profitably navigate the options market, Minyanville is launching "9 Weeks to Better Options Trading," an educational series aimed at increasing trader understanding of the nuts and bolts of options, with an emphasis on real-world applications. In this series, veteran options trader and author of OptionSmith (Click here for a two-week FREE trial and get Steve's best trading ideas in real time) Steve Smith will demystify a range of topics from options pricing to trading strategies to special situations like earnings reports and takeovers.

For the first article in the series, click here.

If you are a novice options trader, we suggest you start with Steve Smith's 6-Week Options Trading Kickstarter series.

With market volatility picking up significantly over the past two weeks, the timing on our topics for this series has been pretty darn good.

Following last week's risk/reversal discussion, we are ready to explore another directionally aggressive strategy, but one that also benefits from an increase in implied volatility: back spreads.

A back spread is a position consisting of all calls, or all puts, with the same expiration, in which one sells a near in-the-money strike and buys a multiple number of contracts in an out-of-the-money strike. The goal is to have as minimal an outlay or debit as possible, while achieving a high ratio of long option contracts to short.

A good rule of thumb is to buy three contracts for every one sold for even money. I tend to use back spreads on the put side as portfolio protection, or straight-out bearish bets.

Let's look at the basic construction of a back spread using our old friend Google (NASDAQ:GOOG), which has been sliding following its April 12 first-quarter earnings report.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE