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

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Long Ratio Backspreads

Long Ratio Backspreads allow an angel investor to take an outright long or short position available in the market without buying a put or call, outright. In certain instances, the ratio will allow the trader to execute a spread that may limit risk without limiting reward for the credit. The size the contracts used and strike differential will determine if the spread can be done for the credit, or maybe it will likely be a debit. The closer the strike cost is the less market risk, but the greater the premium risk.

The decision Ratio Backspread is a bullish strategy. Expect the stock to generate a large move higher. Purchase calls and sell fewer calls with a lower strike, usually in a ratio of 1 x 2 or 2 x 3. The lower strike short calls finance purchasing the more long calls as well as the position is usually inked for no cost or even a net credit. The stock must create a just right move for the gain in the long calls to beat losing in the short calls because the maximum loss is a the long strike at expiration. Because the stock needs to create a large move higher for the back-spread to generate a profit, use as long an occasion to expiration as you can.

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

An extended Backspread involves selling (short) at or in-the-money options and buying (long) a lot more out-of-the-money options of the same type. The Bubba’s Classified Option Report which is sold needs to have higher implied volatility as opposed to option bought. This is termed volatility skew. The trade must be made out of a credit. That is, how much money collected for the short options must be in excess of the price of the long options. These conditions are easiest to meet when volatility is low and strike expense of the long choice is at the stock price.

Risk may be the difference in strikes X variety of short options without the presence of credit. The risk is fixed and maximum in the strike in the long options.

The trade is great in all trading environments, specially when attempting to pick tops or bottoms in almost any stock, commodity or future.
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