Todd Horwitz – Long Ratio Backspreads (Bubba’s Playbook pgs 9 – 11)

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Long Ratio Backspreads

Long Ratio Backspreads allow an explorer to look at an outright short or long position out there without purchasing a put or call, outright. In some cases, the ratio will permit the trader to execute a spread that will limit risk without limiting reward for any credit. The size the contracts used and strike differential will determine if the spread is possible for any credit, or maybe if it’s going to be a debit. The closer the strike costs are the less market risk, though the more premium risk.

The phone call Ratio Backspread is often a bullish strategy. Expect the stock to create a large move higher. Purchase calls and then sell fewer calls with a lower strike, usually inside a ratio of a single x 2 or 2 x 3. The lower strike short calls finance the purchase of the more long calls and also the position is generally entered into cost-free or a net credit. The stock has to make a large enough move for the gain in the long calls to overcome losing from the short calls as the maximum loss is at the long strike at expiration. Because the stock should make a large move higher for the back-spread to create a profit, use so long as a period to expiration as possible.

The Trade
The Trade: AliBaba
Date Initiated: August 9, 2016
Options Used: CALLS
Strikes: 85/86
Credit Collected: .10
Max Risk: 90.00
Max Reward: Unlimited

The Exit
The Exit: Bullish BABA
Sell 1 Contracts August 19th 85 CALL
Buy 2 Contracts August 19th 86 CALLS
Total for Trade: Credit of .10
Sell the 1 extra 86 CALL for 12.00
creating a 1100.00 profit

But there is more…

Rules for Trading Long Option Ratio Backspread

A long Backspread involves selling (short) at or in-the-money options and getting (long) more out-of-the-money options of the identical type. The Bubba’s Classified Option Report that’s sold should have higher implied volatility than the option bought. This is known as volatility skew. The trade should be created using a credit. That is certainly, how much cash collected around the short options should be greater than the price tag on the long options. These conditions are easiest to fulfill when volatility is low and strike price of the long option is at the stock price.

Risk will be the alteration in strikes X number of short options without worrying about credit. The risk is bound and maximum on the strike of the long options.

The trade itself is great in all of the trading environments, specially when looking to pick tops or bottoms in almost any stock, commodity or future.
For more information about Bubba’s Classified Option Report go to see our net page: here