How Does Backspread Applied in Options Market?

Backspread is a kind of option where in an investor holds less short positions, while the long positions held are higher. The collection of premiums from short option sale helps financing long option purchases. As a result of this, traders have sizable exposures in the underlying security or commodity towards the moves expected. Moreover, in case the price moves in opposite direction of the expectation, the loss amount can also be restricted. Such a spread is possible using either put option or call option.

How Does Backspread Applied in Options Market?
An example where Backspread is practiced by the use of call option is here. If a trader sells a $50 call option at $10 and makes a purchase of two options (Call options) at say $55 and $ 4.5 each. Here, there would be gain from bigger moves after $55 as his holding is higher in long option than in short option.

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September 16, 2008 · Filed Under Commodity Options Trading

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