Put Back Spread

Put Back Spreads are excellent strategies when you are expecting a big downward movement in an already volatile stock. The strategy involves selling a put at a higher strike price and buying a greater number of puts at a lower strike price.

Ideally this strategy will be initiated for a minimal debit or possibly a small credit. So if the stock gains ground you wont suffer much either way. If the stock drops the profit potential will be significant as you have more long puts than short. To maximize profit from this strategy many traders use in the money options as they have a higher chance of finishing in the money at expiration.

Example: Using QQQ the Nasdaq 100 Index we can create a put back spread using in the money options. With QQQ trading at $30, you might buy 2 of the $30 Puts at $1.25 and selling one $32.5 Put at $2.70.

In this trade we would receive a credit of $20 ($270 - $250). If the stock goes above $30 you would profit $20. However, the good money is made if the stock made a large move down. The downside breakeven is $27.50, at this price the 30 puts would be worth $2.50 each and the 32.5 put would be worth $5. Below $27.50 the profit potential growth is unlimited.

Using ShareCharts Option Strategies for Put Back Spread the entire transaction can be seen clearly. Go to Derivatives < Option Strategies and select Put Back Spread from the ‘Strategy’ Drop Down Box. Enter in all relevant parameters and click ‘Update’ to view the chart.