This is the eBook version of the printed book.
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. The backspread gives you a two-pronged bet. Since you typically structure them to yield a credit, you win small if the entire trade goes worthless. You also have extra long puts on a put backspread, and extra long calls on a call backspread, so you potentially win big if the underlying stock moves sharply beyond your strike prices. That sounds fantastic, like getting paid to buy a lottery ticket. Alas, you face risks, too. You lose if the underlying stock hovers near the strike price you own or if implied volatility of the options declines while the stock moves into unfavorable territory. Even so, backspreads provide excellent risk/reward characteristics if you want to bet on a move in the underlying stock. In this Investing Short, Adam Warner shows you how.
About the Author
Adam Warner is currently Options Editor at Minyanville.com and a proprietary option trader with Addormar Co. Inc. He co-wrote the options column on Street Insight from 2003-2005, and is author of Options Volatility Trading: Strategies for Profiting from Market Swings.