Trading Option Backspreads

Adam Warner

A backspread is an option spread in which a trader carries a short position in one option series and a greater quantity of long position in another option series. 

For example, hypothetical stock XYZ has a price tag of $55. In a typical put backspread, the trader sells 1 put with a strike of 50, and buys 2 puts with a strike of 45.

He can structure it any way he wants, but usually will pick two out-of-the-money (OTM) strikes and put the trade on at a ratio that yields a net credit. On the put backspread above, he may sell the 50 strike put at $4, and buy the two 45 strike puts at 1.50 each, generating a net credit of 1.00, or $100 for his effort.

He can also use calls. He may sell 1 60 strike call and buy ...