Chapter 5Ratio Backspreads

In the last chapter you learned about how to trade when you’re anticipating an increase in volatility but where you have no bias as to the direction the stock may go in. But what if you do have a bias? What if you feel sure of volatility and you’re biased in one particular direction—is there a way we can take advantage of that?

The answer is yes, and it comes in the form of ratio backspreads.

If you believe volatility is about to rise and your bias is bullish, you would trade a call ratio backspread, and if your bias is bearish, you would trade a put ratio backspread. The idea is that when you get it right, you are rewarded by faster increases in profit. When you get it very wrong, you’re not punished because at least ...

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