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It is a spread that gains deltas in the direction that price is going. As
price goes up the positive deltas increase and if the price goes down the
the positive deltas decrease and then become negative deltas. that is why
most back spreads start out as delta neutral. As the price rises you can
adjust the spread to remain delta neutral. Many trades use backspreads with
a bias. I want to be 500 deltas long. and every time I get to 750 or 1000
deltas, etc. long I adjust buy selling deltas to once again be 500 deltas
long. In this case if you are really wrong and the bottom drops out like
after some of the current earnings reports. You will go from 500 long to
even, losing money and then from even to negative deltas gaining profits as
the price continues down. these a volatility spreads and are spreads that
should be adjusted based upon a plan and profits should be harvested. It is
a nice situation to be able to sell into a rising market and buy into a
falling one. Good trading.
dshin wrote:
> Need help:
>
> I have been trying to find a good description on how to construct Back
> Spread Option.
>
> Any help would be appreciated.
>
> Dkoug
>
>
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