Online Courses - Basics of Spreading: Ratio and Backspreads

Course Overview:

Second in the series, this module presents detailed explanations and examples of Ratio and Backspreads.

The following spreads are covered in this module:

  • Call Backspread
    A call backspread is made up entirely of call options on the same underlying stock (or index). It’s constructed by purchasing two or more calls with one strike price and selling (writing) fewer calls than purchased with a lower strike price but same expiration month.
  • Put Backspread
    A put backspread is made up entirely of put options on the same underlying stock (or index). It’s constructed by purchasing two or more puts with one strike price and selling (writing) fewer puts than purchased with a higher strike price but same expiration month.
  • Ratio Call Spread
    The ratio call spread is made up entirely of call options on the same underlying stock (or index). It’s constructed by purchasing one or more calls with one strike price and selling (writing) more calls than purchased with a higher strike price but same expiration month.
  • Ratio Put Spread
    A ratio put spread is made up entirely of put options on the same underlying stock (or index). It’s constructed by purchasing one or more puts with one strike price and selling (writing) more puts than purchased with a lower strike price but same expiration month.

Each Spread discussion includes an analysis of:

  • General Nature & Characteristics
  • Debit vs. credit
  • Motivation for Spreading
  • Risk vs. Reward
    • Maximum Loss
    • Maximum Profit
    • Upside/Downside Profit/Loss
    • Break Even Point
  • Profit & Loss Before Expiration
  • Effect of Volatility
  • Effect of Time Decay
  • Assignment Risk

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