← AdvancedLesson 23 · 4:41
Ratio spreads and backspreads
Summary
You can build call and put ratio spreads and backspreads and say where each one's danger zone sits. You can explain why a ratio spread's peak only arrives on the last day, and how skew makes the put ratio spread cheap.
Key terms
- ratio spread
- Buying one option and selling two further out, so one sold option is uncovered.
- backspread
- Selling one option and buying two further out, which loses most near the strikes and is paid by a big move.
- danger zone
- The part of a payoff graph where the loss grows, often without limit.
Check yourself
Answer each question to see why the right answer is right.
1. You buy the $100 call for $345 and sell two $105 calls for $316. What is the shape on the last day?
2. XYZ rises a lot, to $115. What happens to the call ratio spread?
3. XYZ jumps to $105 right away, with 30 days left. Are you at the $471 peak?
4. You sell the $100 call and buy two $105 calls, collecting $29. What is this, and where is its worst case?
5. On the example skew, the put ratio spread costs just $3 instead of $59. Why so cheap?
Finished the video and the quiz? .