Back Spreading

[Aerist]

I've been testing this strategy in the commodity market on an options and futures simulator, and it has proved very successful. I seem to find so many nice trades to run this on especially in the commodity markets since they trend nicely and have a tendency not to sit still. Since a reverse call spread should be established with a credit, I really have found this an amazing way to increase yields while limiting risk.

To set one of these up:

Find a security / contract trading in between two strike prices.

Buy 2 of the higher strike price

Sell 1 of the lower strike price.

Limited upside potential exists because he owns twice as many calls as he has short; however, downside is limited if the underlying item were to collaspse because the long calls would expire worthless, and the write would expire allowing the trader to collect the premium.

Maximum loss would occur if the item were trading exactly at the price when the spread was initiated.

Of course, deltas could be used to create a neutral strategy, but that is for another time.

Anyone else have any successful experiences with reverse ratio call spreads? I've found that on gold this has worked well. Also, this worked well with T-Bonds and other fast moving commodities.

[WallStGolfer31]

I've always had backspreads as sell 1 ATM call, buy 2 OTM calls instead of what you have as sell 1 ITM call and buy 2 OTM calls.

I've heard lots of happy players putting this trade on, but I don't usually take directional positions. But, If you're talking gamma-delta neutral, thats what I'm talking about lol.

[Aerist]

I usually like ITM because the credit is nice. Also, I was talking to some old trader friends who have done very well, and they said when they traded options they did this much of the time, and it was very nice.

This spread seems like making money is so easy?

[WallStGolfer31]

I guess so, if your doing it for a fairly large credit, and you have a fairly volatile underlying, then you'll be making some money. I usually tailor the trade to the situation, instead of vice versa. But if you're trading volatility, and want a slightly better profit outlook IMO, I'd be trading some strangles and straddels, maybe even a butterfly if I could get a good one established. Volatility is fun though eh? lol

[Aerist]

I like the credit. GM bonds as collateral.