What is this strategy called?

[torontoman]

Buy x number of calls,
Sell a lower amount of higher priced calls in the same month.

eg. Buy 10 xyx $50 calls AND sell 5 $55 calls in the same month.

I've never seen this advised.

Thanks,

Torontoman

 

[nazzdack]

??..........an underwrite?..........a leveraged bull-call spread?

 

[Eliot Hosewater]

It's a call backspread. You can also do a put backspread. Limited risk and potentially unlimited gain.

If you sell more than you buy it's a ratio write, and some will be naked (i.e. unlimited risk).

 

[torontoman]

Quote from Eliot Hosewater:

It's a call backspread. You can also do a put backspread. Limited risk and potentially unlimited gain.

If you sell more than you buy it's a ratio write, and some will be naked (i.e. unlimited risk).

thank you very much!

 

[Profitaker]

Quote from torontoman:

eg. Buy 10 xyx $50 calls AND sell 5 $55 calls in the same month.

It's not a backspread - in a call backspread you sell the near strike and buy the far strike x 2. Same for a Put backspread.

I don't believe the above is a recognised strategy, but hey, what's in a name ?

 

[Eliot Hosewater]

Quote from Profitaker:

It's not a backspread - in a call backspread you sell the near strike and buy the far strike x 2. Same for a Put backspread.

I don't believe the above is a recognised strategy, but hey, what's in a name ?

I was going by MacMillan's definition:

"Strategies in which you own more options than you sell, and that therefore have theoretically large or unlimited profit potential are known as backspreads. ... In a larger sense, however, any strategy with unlimited profit potential and limited risk is called a backspread by some traders. In this broader definition, even a long straddle would be considered a backspread."

 

[Profitaker]

Quote from Eliot Hosewater:

I was going by MacMillan's definition.....

Sure, but I don't believe it is a recognised strategy by any of the exchanges, and in that context, it's certainly not a backspread.

 

[atticus]

It's termed a shart when you lose on marks.

 

[deviltrader]

Aside from what it's called, the better question for torontoman is, why would you want to do this?

 

[RichardRimes]

Quote from Profitaker:

Sure, but I don't believe it is a recognized strategy by any of the exchanges, and in that context, it's certainly not a backspread.

It is absolutely a recognized strategy....it is a ratio(ed) spread in this case a 1:2 simple ratio. On the TOS platform you can "buy" a "backratio" (as a single click trade) which is +2 of the 50 calls and -1 of the 55's or you can "sell" the backratio which is -1 of the 50 calls and +2 of the 55's. This can be a good trade on very volatile stocks like goog or rimm where you think the stock may explode to the upside (or downside if you want to do puts).

If you buy the backratio your only risk is the up front debit which is what you are proposing in this trade. Basically you are saying I'm bullish on this stock but I want to "hedge" a bit of my bet because I'm not really sure it will go over 55...however if it does I want to participate in the run up.