
Backspread
A backspread is s a type of option trading plan in which a trader buys more call or put options than they sell. A call backspread or call ratio backspread is constructed by selling (writing) fewer call options on an underlying security than are bought. A put backspread or put ratio backspread is constructed by selling (writing) fewer put options on an underlying security than are bought. The backspread trading plan can focus on either call options or put options on a specific underlying investment. A backspread is s a type of option trading plan in which a trader buys more call or put options than they sell.
What Is a Backspread?
A backspread is s a type of option trading plan in which a trader buys more call or put options than they sell. The backspread trading plan can focus on either call options or put options on a specific underlying investment. A backspread is a complex trading strategy with high risks that is typically only used by advanced traders.
How a Backspread Works
A backspread will generally be constructed as either a call backspread or a put backspread. A backspread can also be considered a type of ratio strategy since it will make unequal investments in two types of options. A backspread is the opposite of a frontspread in which a trader sells more options than they buy.
Ratio Spread
The term ratio spread helps a trader to illustrate and understand the ratio of a two-legged trading plan. A standard spread strategy occurs when an investor makes equal investment in both legs of the trading plan with a theoretical ratio of 1:1. Any spread strategy that does not invest equally in two legs of a trading plan is considered a ratio strategy with the ratio calculated based on the weightings of the investments.
Call Backspread
A call backspread or call ratio backspread is constructed by selling (writing) fewer call options on an underlying security than are bought. A trader will typically sell call options and use the proceeds to buy call options on the same security. A call backspread is a bullish trading plan that seeks to gain from a rising underlying security value.
One example of a call backspread could consist of writing a call with a low strike price and simultaneously buying two call options of a higher strike price. In a call backspread all of the options will have the same expiration and underlying.
Put Backspread
A put backspread or put ratio backspread is constructed by selling (writing) fewer put options on an underlying security than are bought. A trader will typically sell put options and use the proceeds to buy put options on the same security. A put backspread is a bearish trading strategy that seeks to gain from a falling underlying security value.
For one example, a put backspread could consist of writing one put with a higher strike price and simultaneously buying two put options with a lower strike price. Backspreads will use option contracts that have the same expiration and underlying. Typically, they are constructed on a 2:1, 3:2 or 3:1 ratio.
Frontspread
A frontspread will deploy a trading plan in which a trader sells more contracts than they buy. Frontspreads are also constructed as either a call frontspread or a put frontspread.
Related terms:
Call Ratio Backspread
The call ratio backspread uses long and short call options in various ratios in order to take on a bullish position. read more
Leg
A leg is one component of a derivatives trading strategy in which a trader combines multiple options contracts or multiple futures contracts. read more
Long Leg
Long leg is part of a spread or combination strategy that involves taking two positions simultaneously to generate a profit. read more
Multi-Leg Options Order
A multi-leg options order is a trade that involves executing two or more options transactions within a single order. read more
Options
Options are financial derivatives that give the buyer the right to buy or sell the underlying asset at a stated price within a specified period. read more
Put Ratio Backspread
A put ratio backspread is an option strategy that combines short puts and long puts and seeks to profit from the volatility of the underlying stock. read more
Ratio Call Write
A ratio call write is an options strategy where more call options are written than the amount of underlying shares owned. read more
Ratio Spread
A ratio spread is a neutral options strategy in which an investor simultaneously holds an unequal number of long and short positions in a specific ratio. read more
Reverse Calendar Spread
Reverse calendar spread involves buying and selling a short and long term option on the same underlying security with the same strike price. read more