Compare Normal Spreads, Ratio Spreads and Back Spreads strategies

This item was filled under [ Option Strategies ]

 

All these strategies are nothing but the variation of spreads. Difference and hence the new name comes from the selection of particular option contract and their quantity.  So if we understand the concept of spread then we can easily create the variation without getting lost into “What this strategy is called ?”.. 

 

What we need to focus is the concept of spread, behaviour of various option contracts i.e. ITM/ OTM /ATM and effective Risk/Reward/Breakeven points that combination will produce. 

 

Ofcourse, we need to have the view on the direction of market (up/down/sideway), and current volatilty (high/low) are pre-requisite. Debit strategies are fine in low IV markets whereas Credit strategies work well in high IV market.

 

To clarify, I am comparing the variation of call strategies below

 

Strategy

Strikes

Nature of Strategy

Risk

Reward

Higher

Lower

Long call

 

+1

Bullish Limited High
Call Spread Debit

-1

+1

Bullish Limited Limited
Call Back Spread

+2

-1

Bullish Limited High
Short call

 

-1

Bearish High Limited
Call Spread Credit

+1

-1

Bearish Limited Limited
Call Ratio Spread

-2

+1

Bearish High Limited

 

 

That means, in each case, we are just adjusting the Qty to buy/sell, and the strike price.  As long as net CALL position is positive, it is bullish strategy. and if it is negative then it is bearish.

 

The main decision making parameters are

- View about the market direction and their strength,

- Risk and

- Reward. 

 

Depending on our assessment of market condition (blindly bullish, mild bullish, or not sure still bullish etc), we can pickup the appropriate strategy.

 As always, feel free to leave your views/comments below.

 

Happy Trading.

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