22 lines
1.5 KiB
Plaintext
22 lines
1.5 KiB
Plaintext
for the loss on the 70 call. In this case, the breakeven is $79 (the $4
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maximum potential loss plus the strike price of 75).
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While it’s good to understand this at-expiration view of this trade, this
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diagram is a bit misleading. What does the trader of this spread want to
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have happen? If the trader is bearish, he could find a better way to trade his
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view than this, which limits his gains to 1.00—he could buy a put. If the
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trader believes the stock will make a volatile move in either direction, the
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backspread offers a decidedly limited opportunity to the downside. A
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straddle or strangle might be a better choice. And if the trader is bullish, he
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would have to be very bullish for this trade to make sense. The underlying
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needs to rise above $79 just to break even. If instead he just bought 2 of the
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75 calls for 1.10, the maximum risk would be 2.20 instead of 4, the
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breakeven would be $77.20 instead of $79, and profits at expiration would
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rack up twice as fast above the breakeven, since the trader is net long two
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calls instead of one. Why would a trader ever choose to trade a backspread?
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EXHIBIT 16.1 Backspread at expiration.
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The backspread is a complex spread that can be fully appreciated only
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when one has a thorough knowledge of options. Instead of waiting patiently
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until expiration, an experienced backspreader is more likely to gamma scalp
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intermittent opportunities. This requires trading a large enough position to
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make scalping worthwhile. It also requires appropriate margining (either
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professional-level margin requirements or retail portfolio margining). For |