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.
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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
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