Pedroall replies to: Making Money Trading Options

The call backspread (reverse call ratio spread) is a bullish strategy in options trading that involves selling a number of call options and buying more call options of the same underlying stock and expiration date at a higher strike price. It is an unlimited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience significant upside movement in the near term.

Sell 1 ITM Call
Buy 2 OTM Calls
A 2:1 call backspread can be implemented by selling a number of calls at a lower strike and buying twice the number of calls at a higher strike.

Example
Suppose XYZ stock is trading at $43 in June. An options trader executes a 2:1 call backspread by selling a JUL 40 call for $400 and buying two JUL 45 calls for $200 each. The net debit/credit taken to enter the trade is zero.
On expiration in July, if XYZ stock is trading at $45, both the JUL 45 calls expire worthless while the short JUL 40 call expires in the money with $500 in intrinsic value. Buying back this call to close the position will result in the maximum loss of $500 for the options trader.
If XYZ stock rallies and is trading at $50 on expiration in July, all the options will expire in the money. The short JUL 40 call is worth $1000 and needs to be bought back to close the position. Since the two JUL 45 call bought is now worth $500 each, their combined value of $1000 is just enough to offset the losses from the written call. Therefore, he achieves breakeven at $50.
Beyond $50 though, there will be no limit to the gains possible. For example, at $60, each long JUL 45 call will be worth $1500 while his single short JUL 40 call is only worth $2000, resulting in a profit of $1000.
If the stock price had dropped to $40 or below at expiration, all the options involved will expire worthless. Since the net debit to put on this trade is zero, there is no resulting loss.
Note: While we have covered the use of this strategy with reference to stock options, the call backspread is equally applicable using ETF options, index options as well as options on futures.
Commissions
For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.
However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a low fee of only $0.15 per contract (+$4.95 per trade).
====================================
The put backspread (reverse put ratio spread) is a bearish strategy in options trading that involves selling a number of put options and buying more put options of the same underlying stock and expiration date at a lower strike price. It is an unlimited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience significant downside movement in the near term.
Put Backspread Construction
Sell 1 ITM Put
Buy 2 OTM Puts
A 2:1 put backspread can be implemented by buying a number of puts at a higher strike and buying twice the number of puts at a lower strike.

Example
Suppose XYZ stock is trading at $48 in June. An options trader executes a 2:1 put backspread by selling a JUL 50 put for $400 and buying two JUL 45 puts for $200 each. The net debit/credit taken to enter the trade is zero.
On expiration in July, if XYZ stock is trading at $45, both the JUL 45 puts expire worthless while the short JUL 50 put expires in the money with $500 in intrinsic value. Buying back this put to close the position will result in the maximum loss of $500 for the options trader.
If XYZ stock drops to $40 on expiration in July, all the options will expire in the money. The short JUL 50 put is worth $1000 and needs to be bought back to close the position. Since the two JUL 45 puts bought is now worth $500 each, their combined value of $1000 is just enough to offset the losses from the written put. Therefore, he achieves breakeven at $40.
Below $40 though, there will be no limit to the gains possible. For example, at $30, each long JUL 45 put will be worth $1500 while his single short JUL 50 put is only worth $2000, resulting in a profit of $1000.
If the stock price had rallied to $50 or higher at expiration, all the options involved will expire worthless. Since the net debit to put on this trade is zero, there is no resulting loss.
Note: While we have covered the use of this strategy with reference to stock options, the put backspread is equally applicable using ETF options, index options as well as options on futures.
Commissions
For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.
However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a low fee of only $0.15 per contract (+$4.95 per trade).

Attached Images (click to enlarge)

Click to Enlarge Name: 2018-05-29-StockAndOptionQuoteForQQQ.png Size: 165 KB Click to Enlarge Name: 2018-05-29-StockAndOptionQuoteForQQQ #2.png Size: 152 KB

impossible to predict with any certainty if PRICE are headed UP OR DOWN

Leave a Reply

Your email address will not be published. Required fields are marked *