Chapter 13: Reverse Spreads 
FIGURE 13-2. 
Reverse ratio spread (backspread). 
C: 
~ +$200 
;% 
:!:: 
e 
a. -$300 
Stock Price at Expiration 
235 
merely used a 2:1 ratio for convenience, instead of using the 2.3:l ratio. If anything, 
one might normally establish the spread with an extra bullish emphasis, since the 
largest profits are to the upside. There is little reason for the spreader to have too lit­
tle bullishness in this strategy. Thus, if the deltas are correct, the neutral ratio can aid 
the spreader in the determination of a more accurate initial ratio. 
The strategist must be alert to the possibility of early exercise in this type of 
spread, since he has sold a call that is in-the-money. Aside from watching for this pos­
sibility, there is little in the way of defensive follow-up action that needs to be imple­
mented, since the risk is limited by the nature of the position. He might take profits 
by closing the spread if the stock rallies before expiration. 
This strategy presents a reasonable method of attempting to capitalize on a 
large stock movement with little tie-up of collateral. Generally, the strategist would 
seek out volatile stocks for implementation of this strategy, because he would want as 
much potential movement as possible by the time the calls expire. In Chapter 14, it 
will be shown that this strategy can become more attractive by buying calls with a 
longer maturity than the calls sold.