Backspread

The backspread is the converse strategy to the ratio spread and is also known as reverse ratio spread. Using calls, a bullish strategy known as the call backspread can be constructed and with puts, a strategy known as the put backspread can be constructed.

The call backspread (reverse call ratio spread) is a bullish strategy in options trading whereby the options trader writes a number of call options and buys more call options of the same underlying stock and expiration date but at a higher strike price. It is an unlimited profit, limited risk strategy that is used when the trader thinks that the price of the underlying stock will rise sharply in the near future.

A 2:1 call backspread can be created by selling a number of calls at a lower strike price and buying twice the number of calls at a higher strike.

The put backspread is a strategy in options trading whereby the options trader writes a number of put options at a higher strike price (often at-the-money) and buys a greater number (often twice as many) of put options at a lower strike price (often out-of-the-money) of the same underlying stock and expiration date. Typically the strikes are selected such that the cost of the long puts is largely offset by the premium earned in writing the at-the-money puts. This strategy is generally considered very bearish but it can also serve as a neutral/bullish play under the right conditions.

The maximum profit for this strategy is achieved when the price of the underlying security moves to zero before expiration of the options. Given these declarations:

${\displaystyle {\begin{aligned}K_{l}&={\text{lower strike price}}\\K_{u}&={\text{upper strike price}}\\C_{n}&={\text{net credit per share}}\\N&={\text{number of shares per options contract}}\end{aligned}}}$

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