Back Spreads with Calls and Puts: Setup, Risks and Uses

Transcription

1 Back Spreads with Calls and Puts: Setup, Risks and Uses TradeKing is a member of FINRA & SIPC October 11, 2011 Disclaimer Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options, sent to you in previous communication. Additional copies may be obtained by calling TRADEKING at KING visiting or by downloading the file in the pop-up window on your screen. Multiple leg options strategies involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult a tax advisor. Any strategies discussed and examples using actual securities and price data are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results. Consider the following when making an investment decision: your financial situation, your risk profile and transaction costs. System response and access times may vary due to market conditions, system performance, and other factors. The projections or other information generated by TradeKing's tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. 1

2 Disclaimer While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility, there is no guarantee that this forecast will be correct. Market timing is a complex investment strategy which involves risk and may incur additional commission costs. Webinars are provided for educational and informational purposes only. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products. 5 Back Spreads with Calls and Puts: Setup, Risks and Uses TradeKing is a member of FINRA & SIPC October 11,

3 Back Spreads This is an interesting and unusual strategy. Essentially, you re selling an at-the-money short call (bullish) or put (bearish) spread in order to help pay for the extra out-of-the-money of the long option. Call Back Spread: Sell 1 Nov 60 Call, Buy 2 Nov 65 Calls Put Back Spread: Sell 1 Nov 5 Put, Buy 2 Nov 0 Puts Aliases Ratio Volatility Spread Pay Later Call or Put 7 Back Spreads: Setup, Risks, and Uses Examples 3

4 Back Spread with Calls (ATM 75%) Sell 1 XYZ 17-day Buy 2 XYZ 17-day $6.90 Net Debit 2.80 At expiration (17 days have past): Max Risk: ( ) = 7.80 Max Gain: Unlimited want stock to be above at expiration Break-Even = Commission 9 Back Spread w/calls P&L Diagram Sell 1 XYZ 17-day Buy 2 XYZ 17-day 125 Commission: $6.90 Net Debit B.E. = Profit & Loss Stock Price at Expiration

5 Back Spread with Puts Sell 1 XYZ 17-day Buy 2 XYZ 17-day $6.90 Net Debit 3.00 At expiration (17 days have past): Max Risk: ( ) = 8.00 Max Gain: substantial $107 want stock to be above at expiration Break-Even = Commission 11 Back Spread w/puts P&L Diagram Sell 1 XYZ 17-day Buy 2 XYZ 17-day Commission: $ Net Debit B.E. = Profit & Loss Stock Price at Expiration 5

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