Back Spreads using Options

January 25, 2010

A back spread is a good way to construct a limited risk option spread. It is especially effective if volatility is relatively low.

Using a bullish call back spread as an example, this strategy involves buying 2 slightly out-of-the money call options and selling one slightly in-the-money call option.  This example uses options linked to the May Corn Futures Contract.

If the market trades higher, then the position should make profit.  In this example, we look at 20 days for our holding time, as our computer model suggests that holding on much longer than that will produce larger losses than we desire, and thereby negate the benefits of this type of trade.

This trade is ideal when volatility is low and we are expecting an imminent move to the upside.

Click here or on the image below for a more detailed view of the characteristic shape of the profit and loss curves for the call back spread strategy.

call option back spread

Bull Call Option Back Spread

Leave a Comment

Previous post:

Next post: