9 Weeks to Better Options Trading: Back Spreads
Veteran options trader Steve Smith breaks down the back spread.
1. If you establish a back spread with more than two weeks until expiration, only plan on holding until there is at least one week remaining until expiration. If the big move you were expecting doesn’t occur, it makes sense to just get out.
2. If the stock moves opposite your prediction, as in higher on a put/bear back spread, think about buying back the short portion of the position as a decrease in value also creates a less attractive risk/reward for remaining short it. Remain long the out-of-the-money strikes at a lower effective cost basis. Many times, these seemingly worthless options can come back to life and produce big profits.
Back spreads can be powerfully profitable, but they must be used judicially and traded around nimbly.
For more from Steve Smith, take a FREE 14-day trial to OptionSmith and get his specific options trades emailed to you along with exclusive access to his full portfolio. Learn more.
Here is a complete schedule for "9 Weeks to Better Options Trading":
Week 1: 5 Rookie Mistakes Options Traders Make
Week 2: Option Pricing Basics: Understanding Implied Volatility and Time Decay
Week 3: Trading Strategy: The Power of Calendar Spreads
Week 4: Trading Strategy: Butterfly Spreads
Week 5: Trading Strategy: Iron Condors
Week 6: Trading Strategy: Risk Reversals
Week 7: Trading Strategy: Back Spreads
Week 8: Managing Risk
Week 9: Special Situations: Earnings Reports, Takeovers, and Extreme Market Moves
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.