Put Backspread
| B/S | Strike | Type | Price |
|---|---|---|---|
| Buy 2 | $43 | Put | $0.50 |
| Sell 1 | $45 | Put | $1.29 |
| Net Credit | ($29) | ||
A Put Backspread is buying two OTM puts for every one ITM put option purchased. 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.
Characteristics
When to use: When you are bearish on market direction and bullish on volatility.
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. This means that after you buy 2 OTM puts and sell 1 ITM put the net effect should be a credit to you. I.e. you should receive money for this spread as your are short more than you are long.
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.
Put Backspread Greeks
Delta
Gamma
Vega
Theta
28 Comments
Peter March 27th, 2017 at 10:40pm
I see now...I believe the NIFTY option contracts convert 1 to 1 with the NIFTY futures, correct? 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:
Your position delta is very sensitive around the 8,960 level for the NIFTY...below that your position is negative and above your position becomes positive. So with the NIFTY now at 9,045 your position is now long.
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?
ravinder March 23rd, 2017 at 12:00am
hi peter
screen shot is not possible but below i give you detail of my greeks
delta long +55
gamma short -1.90
vega short -3000
theta positive +250
Long 8700 $8900 Puts @ 8.55
Short 6000 $9000 Puts @ 21
Short 300 Futures @ 9128
expiry date is 30 march 2017, i cant hold it till expiry
Peter March 22nd, 2017 at 12:04am
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?
ravinder March 21st, 2017 at 11:54pm
Hi Peter,
but my portfolio delta is already 100 out, if I buy some future back then it become more out.
Peter March 21st, 2017 at 10:28pm
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:
Long 8700 $8900 Puts @ 8.55
Short 6000 $9000 Puts @ 21
Short 300 Futures @ 9128
Are you short or neutral the Nifty? If you are neutral then I'd suggest buying back some of those futures.
ravinder March 21st, 2017 at 2:37am
hi peter
I have a position in nifty as, buy 8900 strike pe qty 8700 at 8.55, sell 9000 strike pe qty -6000 at 21 and also sell nifty future qty -300 at 9128,
all expiry are same 30 march 2017, i cant hold it till expiry
i getting confuse about profit and lose, my view is market is neutral or near about down, Are you think it is ok
Peter December 6th, 2016 at 7:17pm
Hi Prashant,
You receive premium when selling options (credit) and pay when buying options (debit).
Prashant December 2nd, 2016 at 11:06am
When do we recive premimum?
In short put or long put?
Peter March 29th, 2012 at 11:45pm
Hi Azad,
Are you mixing different underlyings here? What is SBI?
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.
Azad March 29th, 2012 at 11:01am
Hi Peter,
I used 3 lots of Nifty and 1 lot of SBI.I am very surprise that Put back spread not working at all, I give you one Example : When Nifty trade above 5400, I buy 2 lots of 5400 PE at 68 and Short 1 lot of 5700 PE at 218 now today is the expire day and my long 5400 PE expire at 214 and short 5700 PE expire at 534, now you see where is the profit ? One other example I give you I buy 2 lots of SBI {125 shares } 2150 PE at 84 and Short 1 lot of 2350 PE at 178 now after expire today price is 2150 PE at 88 and 2350 PE at 300 when SBI spot last close at 2060, huge loss, My other two Nifty position went more losses. I told you these are the worst strategy I used in my entire trading carrier, God save all who used these.
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