May 2012
Beginner
793 pages
20h 29m
English
book
Trading Commodities, Commodity Options and Currencies (Collection)
by Paul Brittain Carley Garner
Content preview from Trading Commodities, Commodity Options and Currencies (Collection)
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chapter 8The Other Ratio Spreads
As mentioned, ratio spreads come in various forms. A version that we less commonly use is the back spread. This trade involves the sale of a close-to-the-money option and the purchase of two options of the same type with distant strike prices. This trade is a mirror image of the previously covered ratio spreads.
A back spread comprises of either calls or puts, but not both, in the same expiration month. Because there isn’t a naked, or uncovered leg in the spread, the trader is not liable for theoretically unlimited losses. Instead, a back spread trader faces limited risk and unlimited profit potential.
The trade can be executed as a credit (you collect more premium on the short option than you pay for ...
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