This article was originally published in The Option Strategist Newsletter Volume 4, No. 9 on May 11, 1995.
Much is written about strategy and about establishing positions. If you're bullish, buy calls, buy bull spreads, or even backspreads. If you're bearish, opposing strategies will work. Then breakeven points are calculated, rates of return are estimated, and the position is established. End of story; go calculate your P&L. Or is it? What about follow-up action? So little is written about it that many traders figure it's a sort of a seat of the pants affair.
This article was originally published in The Option Strategist Newsletter Volume 2, No. 7 on April 8, 1993.
Many strategists like to position themselves so that they can make money when the underlying security swings wildly, rather than having to scramble as naked option sellers must during such wild price swings. One strategy that allows the strategist to do this is the "backspread". In general a backspread consists of selling an in-the-money option and then buying a larger quantity of out-of-the-money options, all on the same underlying instrument. Some traders even use a broader definition, preferring to use the term "backspread" to refer to any strategy in which one can make money on large price moves; by this alternate definition, straddle purchases and combination purchases would qualify as backspreads as well. For the purposes of this article, we will stick with the first, more restrictive definition.
This article was originally published in The Option Strategist Newsletter Volume 20, No. 14 on July 29, 2011.
There has been something of a “buzz” in volatility forums and in some media articles about a backspread strategy that is designed to take the loss out of using $VIX options for protection or speculation. As you know, we are running a “perpetual call buy” strategy for long $VIX calls (Position S610). Also, this week we recommended the purchase of $VIX calls as protection for stock portfolios, for those who were worried about what might happen in the event of a downgrade of U.S. debt or a failure to raise the debt ceiling. However, this backspread strategy purports to be better because it allows you to exit before much, if any, loss occurs. As all thinking traders know, however, there is no free lunch. If there’s really no risk, then something else has to give. You’ll see what we mean.
This article was originally published in The Option Strategist Newsletter Volume 4, No. 8 on April 27, 1995.
Since we are currently recommending a "backspread" strategy in OEX options (and have been for a while), we though it might be beneficial to define and review the strategy for subscribers who are not familiar with the term.
