Benefits of back ratio

C

clarodina

Have sone qns abt using back ratio spread vs long naked option

1) What the benefits of using back ratio call or put vs long call or put? The back ratio have a v bottom traders have to careful about vs long call or put

2) What are some of the ways to finance the back ratio spread?
 
Are you asking about buying 2 OTM options and selling 1 closer? If that is true, you would do that looking for a binary event in one direction. If the event does not occur, or if the stock stands still or moves in the other direction, you will lose little or if you set up for a credit, make money. If you just bought a call or put, you would be a loser if you don't pick the right direction.

I'm not a big fan of the buy 2, sell 1 unless the market is really mispriced, which can happen more often on the call side.
 
But what are the benefits of back ratio compare to naked option? And how to finance their debit? Establish with credit are possible but have very big v
 
clarodina said:
Have sone qns abt using back ratio spread vs long naked option

1) What the benefits of using back ratio call or put vs long call or put? The back ratio have a v bottom traders have to careful about vs long call or put

2) What are some of the ways to finance the back ratio spread?
More...
Just a comment: "long naked option"? Your references to "naked" seem incorrect!
 
clarodina said:
But what are the benefits of back ratio compare to naked option? And how to finance their debit? Establish with credit are possible but have very big v
More...

Why not simply chart the differences? Grab a napkin if need be and draw the graph at various strike prices (granted it will only give you an idea at expiration), you'll need some software to see how the curve gets steeper the closer you get to expiration. There is the "pin risk" of selling the closer ATM option while buying the 2 OTM options...hence, that's why it's advisable only to employ said strategy if you are damn near certain the instrument will move sharply in one direction. Of course, you also play some variation of a broken wing butterfly or other imbalanced ratio spread, but it needs some strategic element to work.
 
Robert using spy febwk1 231 sell 1 233 buy 2 vs buy 233 call

Anyone has some creative suggestion to finance the debit above?
 
From yesterday's close, the midpoint was a 2 cent credit. With commissions let's say that would be close to even. The more important question is, why did you choose those strikes and that week? What is your expectation for the movement of SPY between now and Feb1? Are you expecting a quick move well above 235? That is over 10 SPY points in less than a month.

You have to start with an assumption, then model a trade to match your expectation. Never just look to do a spread.


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