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Track 'n Trade Futures End of Day Options

Backspreads

Video Transcript

In this Track n Trade Pro Options trading training video, I want to talk to you about Backspreads. If you think the direction of the market is going to be upwards, sell one at the money call option, and buy two out of the money call options. So, you might, for instance sell 128.00 Call Option, and buy two 30 Call Options. This is a good strategy to use when you anticipate a large price move in the market. The strategy is the exact opposite of a Call Ratio Spread. When you open a Backspread position, you sell one or more Options, at the same time you buy a large number of Options on the same underlying commodity, that is further out of the money and less expensive.

The Option you sell, pays for the larger number of cheaper Options that you buy.

This is a good strategy to use when you anticipate a large price move, in the market. The strategy is the exact opposite of a Call Ratio Spread. When you open a Back Spread Position, you sell one or more Options at the same time you buy a large number of Options with the same commodity that are further out of the money. And are less expensive.

The Options you sell pay for the larger number of cheaper Options that you buy.

Okay, here's how it works:

If you think the direction of the market is going to be upwards, sell one at the money Call Option, and buy two out of the money Call Options. If, on the other hand, if you feel the market's direction is going to be downwards, sell one at the money Put Option, and buy a two out of the money Put Options. You can use other combinations, as well. For instance, you might sell two and buy three. Okay?

Usually, you'll want to do this trade for credit. That is, if the premium you collect for selling the Options will be more than the cost of the Options that you purchase.

If you can't do it for a credit, try to do it for a no cost, or for a minimal cost, at best. If a large move occurs in the direction you anticipate, you can make a good profit because you're long more Options than you are short.

The only way you can lose with this position is if the price of the underlying commodity is between your two strike prices when the Options expire. In this case, the Options, the Options that you sold would be in the money, while the Options that you purchased would expire worthless.

So, when you're in a Backspread, if the price of the underlying commodity moves between your two strike prices, and stays there, close the trade before the Options expire.


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