Both options are in the same expiration. The Max Loss is limited to the difference between the two strikes less the premium received for the spread. The Max Gain is limited on the upside to the net premium received for the spread. Uncapped on the downside but strictly speaking limited as the stock cannot trade below zero. This strategy could also be referred to as a Short Put Backspread, however, I will refer to this strategy simply as a Put Backspread. A Put Backspread should be done as a credit.
Put Backspread's are a great strategy if you are bullish and bearish at the same time, however, have a bias to the downside. Looking from the payoff, you can see that if the market sells off you make unlimited profits below the break even point. If, however, you are wrong about the direction and the market stages a rally instead, you still win - though your profits are limited.
You might say that this type of strategy is similar to a Long Straddle - and you would be right. The difference is that 1 the profits are limited on one side and 2 Backspread's are cheaper to put on. If so, here is what I get for your payoff profile when using a spreadsheet to replicate your position: And here is your delta profile: What is your view now? If the market goes higher your returns look to be capped on the upside from my calculations. If you cannot hold until expiry, why not just exit the position now?
Your delta is net long? It should be short as you are 1 long more puts than short, and 2 short futures.
What system are you using? Can you email me a screen shot of your position and greeks? Hi Peter, but my portfolio delta is already out, if I buy some future back then it become more out. Hi Ravinder, Your combined position here is more short than neutral and looks more like a long put if I understand correctly.
Is this the breakdown of you trade: If you are neutral then I'd suggest buying back some of those futures. Hi Prashant, You receive premium when selling options credit and pay when buying options debit. Hi Azad, Are you mixing different underlyings here? A put backspread as described here is done at a ratio of 2 to 1 on options on the same underlying within the same expiry date.
I am very surprise that Put back spread not working at all, I give you one Example: When Nifty trade above , I buy 2 lots of PE at 68 and Short 1 lot of PE at now today is the expire day and my long PE expire at and short PE expire at , now you see where is the profit? I told you these are the worst strategy I used in my entire trading carrier, God save all who used these. I am expecting market to go down and infact market going down but still I am lossing big money, better to short in futures I think.
Hi Azad, Sorry to hear of your losses! Long option positions including combinations are negatively affected by the passage of time time-decay , which is determined by the volatility. So if you are planning on being long options or long a combination of options it is best to choose an underlying where the implied volatility is relatively low. If you buy options with a high volatility it can often happen that when the market moves in your favor the value change as a result of the decrease in volatility is greater than that of the gain due to price movements.
What underlying are you trading? I do every thing in this market but still I am not made any money rather I loss almost every thing I have and now I am in huge debt. I am very depress and don't know what to do, where I go. Sounds like the market is not moving fast enough. Hi Peter, One thing I am not understand, I am in this market since but never used this options strategy. I buy options earlier and always losing money, now after visiting your sites I try to used these complex strategy.
Hi Azad, If I am bullish I would look first at a call backspread. Bearish a put backspread. Neutral a long condor also called iron condor if you use both calls and puts. Hi Peter, Just tell me one thing? In other word when you are bearish or bullish which one option strategy's you used.
If you were to exit the trade, you would exit both legs at the same time. The timing, however, is up to you - if the position has made huge gains quickly you might want to exit immediately and move onto your next trade.
Do you hold both legs of this until expiration, or close your positions before then? In other words when and how do you exit?
It is cheaper to put on as a put backspread is normally done for a credit i. It is similar to a long straddle because of the payoff profile. Not exactly the same as the payoff flattens on the upside, but similar all the same. Volatility of price is best described on the Volatility page.
Hi Adarsh, a bear market defines a period where the prices of an asset are in a declining phase. Bear volatility defines a period where the volatility of prices are declining.
They do not necessarily happen at the same time. Many times, especially for equities volatility declines when the stock price rises. Characteristics When to use: When you are bearish on market direction and bullish on volatility. Put Backspread Greeks Delta.
Comments 28 Peter March 27th, at Peter March 21st, at Prashant December 2nd, at In short put or long put? Peter March 29th, at Azad March 29th, at Peter March 28th, at 6: What strikes and expiration date are you trading? Azad March 28th, at 4: Peter March 26th, at 7: Azad March 19th, at 9: Thanks Peter March 5th, at 5: Azad March 2nd, at 9: Peter February 27th, at 5: Azad February 27th, at 7: Peter May 1st, at 7: Ken May 1st, at Peter January 19th, at 4: Peter August 12th, at 6:More...