Backspreads Explained: Unlimited Profit Options Strategy

Backspreads are the opposite of ratio spreads. Instead of selling more options than you buy, you buy more than you sell. This creates a position with limited risk and unlimited profit potential in one direction. Backspreads are ideal when you expect a big move but are not sure of the timing or want to limit your downside. This guide covers everything you need to know about this powerful volatility strategy.

What is a Backspread?

A backspread, sometimes called a reverse ratio spread, is an options strategy where you buy more options than you sell. The most common structure is selling one option at a closer strike and buying two options at a further strike. The premium from the short option helps finance the long options, often allowing you to enter for a small debit, even a credit.

Types of Backspreads

Call Backspread (Bullish)

A call backspread profits from a big move higher. You are very bullish and expect a significant rally.

• Sell 1 lower strike call (at-the-money or near)
• Buy 2 higher strike calls (out-of-the-money)
• Profits accelerate as the stock moves far above the long strikes

Put Backspread (Bearish)

A put backspread profits from a big move lower. You are very bearish and expect a significant decline.

• Sell 1 higher strike put (at-the-money or near)
• Buy 2 lower strike puts (out-of-the-money)
• Profits accelerate as the stock crashes below the long strikes

Profit and Loss Breakdown

Call Backspread P/L (Using the Example)

Scenario 1: Stock stays at $100

• All options expire worthless
• You keep the $1.00 credit ($100 profit)
• This is actually a winning scenario

Scenario 2: Stock rises modestly to $110

• The $100 call is worth $10.00 (loss of $5.00 from $5.00 sold)
• The $110 calls expire worthless (loss of $4.00 paid)
• Net: $5.00 credit - $10.00 = -$5.00 wait, let us recalculate
• $100 call sold for $5, now worth $10 = $5 loss
• $110 calls bought for $4, now worth $0 = $4 loss
• Original credit: $1
• Total P/L: $1 - $5 - $4 = -$8... this is wrong. Let me fix:

Let me recalculate properly:

• Sold $100 call for $5.00, now worth $10.00: Loss of $5.00
• Bought $110 calls for $4.00, now worth $0: Loss of $4.00
• Total: -$5 + (-$4) = -$9.00? No...

The correct calculation at $110:

• Credit received at entry: $1.00
• At expiration with stock at $110:
• Short $100 call is worth $10 (you must pay $10 to close)
• Long $110 calls are worth $0 each
• P/L: $1.00 credit - $10.00 to close short = -$9.00 loss

This is the maximum loss zone - when the stock lands exactly at your long strikes.

Scenario 3: Stock rallies big to $130

• Short $100 call is worth $30.00
• Long $110 calls are worth $20.00 each = $40.00 total
• P/L: $1.00 credit + $40.00 from longs - $30.00 for short = $11.00 profit ($1,100)

Scenario 4: Stock drops to $90

• All calls expire worthless
• You keep the $1.00 credit

Maximum Loss Calculation

Maximum loss occurs when the stock closes exactly at the long strike at expiration:

• Strike difference: $110 - $100 = $10
• Minus the credit received: $10 - $1 = $9
• Maximum loss: $9.00 per share ($900 per spread)

The Backspread Payoff Profile

The backspread has a unique "V-shaped" or "checkmark" payoff profile:

• Below the short strike: Small profit (keep credit) or small loss (if entered for debit)
• Between strikes: Losses increase as you approach the long strike
• At long strike: Maximum loss point
• Above long strike: Profits accelerate with unlimited potential

When to Use Backspreads

Backspreads work best in specific market conditions:

• Expecting a big move: You anticipate a major price change from news, earnings, or events
• Low implied volatility: Options are cheap, making the long options affordable
• Uncertain timing: You know a move is coming but not exactly when
• Risk-defined speculation: You want unlimited upside with known maximum loss
• Volatility expansion plays: You expect IV to rise significantly

Credit vs Debit Entry

Entering for a Credit

When you enter for a credit, you have no risk on the opposite side of your directional bet:

• Call backspread for credit: No risk if stock drops
• Put backspread for credit: No risk if stock rallies
• Maximum loss still exists in the "valley" between strikes

Entering for a Debit

Sometimes you cannot get a credit, especially in low IV environments:

• Your maximum loss increases by the debit amount
• You now have risk on both sides (opposite direction loses the debit)
• Breakeven moves further out

Managing Backspread Positions

If the Stock Moves in Your Direction

• Let the position run to capture unlimited profits
• Consider taking partial profits by selling one of your long options
• Roll the long options higher to lock in gains and maintain exposure

If the Stock Moves Into the Valley

• This is the danger zone - consider closing early for a partial loss
• Roll out in time if you still expect the big move
• Accept the loss if your thesis has changed

If the Stock Stays Flat

• If entered for credit, you profit from staying flat
• Time decay works against your long options
• Close before expiration if no move materializes

Backspreads vs Long Options

Put Backspread Detailed Example

Tips for Success with Backspreads

• Aim for credit entries: Eliminates risk on the non-directional side
• Use before big events: Earnings, FDA decisions, economic reports
• Trade in low IV: Cheap options make the long side affordable
• Give yourself time: Use longer expirations to allow the move to develop
• Accept the valley risk: Know that moderate moves against you hurt the most
• Size appropriately: Maximum loss can still be significant

Common Mistakes to Avoid

• Trading before high IV events: Expensive options reduce your edge
• Strikes too wide: Maximum loss becomes enormous
• Wrong directional bias: Call backspreads lose on big drops into valley
• Holding through the valley: Accept losses before they reach maximum
• Ignoring time decay: Long options lose value daily without movement

Summary

Backspreads offer unlimited profit potential in one direction with defined maximum risk. By buying more options than you sell, you create a position that profits from big moves while limiting your downside. The trade-off is the "valley of death" between your strikes where moderate moves cause maximum pain. Backspreads work best in low IV environments before expected big moves. When entered for a credit, they eliminate risk on the opposite side of your directional bet. Used correctly, backspreads are powerful tools for capturing outsized moves while maintaining risk control.

Want to learn the opposite strategy? Check out our guide on ratio spreads. Or explore straddles for another way to profit from big moves.