A back spread is an options strategy designed to profit from big moves in a stock. It is the opposite of a ratio spread. You sell fewer options and buy more, positioning yourself for explosive moves. This guide explains how back spreads work and when to use them.
What is a Back Spread?
A back spread (also called a ratio backspread) involves selling options at one strike and buying more options at a further strike. The most common ratio is 1:2 (sell one, buy two). You usually enter for a small credit or debit, and you profit when the stock makes a big directional move.
Key concept: You are buying extra options to benefit from big moves. If the stock stays in a range, you might lose. But if it explodes in your direction, the extra long options generate unlimited profit.
Types of Back Spreads
Call Back Spread (Bullish)
Sell one lower strike call, buy two higher strike calls. Profits from big upward moves.
Put Back Spread (Bearish)
Sell one higher strike put, buy two lower strike puts. Profits from big downward moves.
Example: Call Back Spread
Stock ABC is at $100. You expect a big move up (maybe earnings or news).
- Sell 1 x $100 call for $5.00 (receive $500)
- Buy 2 x $110 calls for $2.50 each (pay $500)
- Net cost: $0 (entered for even)
At expiration:
- Stock at $100: All options expire worthless. Result: $0
- Stock at $110: Short call worth $10 ($1,000 loss). Long calls worthless. Net: -$1,000 (max loss)
- Stock at $120: Short call worth $20 ($2,000 loss). Long calls worth $10 each ($2,000 gain). Net: $0
- Stock at $140: Short call worth $40 ($4,000 loss). Long calls worth $30 each ($6,000 gain). Net: +$2,000
The Payoff Profile
A back spread has a distinctive payoff shape:
- Below short strike: Small profit or breakeven (if entered for credit)
- Between strikes: Losses increase as stock approaches long strike
- At long strike: Maximum loss (worst case)
- Beyond long strike: Profit increases with no limit
The danger zone is when the stock moves just enough to hurt your short but not enough to help your longs. The sweet spot is a massive move in your direction.
Why Use Back Spreads?
- Unlimited profit potential: Big moves generate large profits
- Low or zero cost: Short option finances the longs
- Volatility friendly: Benefits from increasing implied volatility
- Defined max loss: Unlike naked options, you know your worst case
- Binary event plays: Great before earnings or announcements
The Risks
The main risk is the stock moving to your long strike and stopping there:
- Moderate moves hurt: Small directional moves are the worst outcome
- Time decay hurts: If the stock does not move, your extra longs decay
- Sideways action: Flat markets erode the position
Remember: Back spreads need a big move to work. If you enter a call back spread and the stock goes up 5%, you might still lose money. You need a significant move to overcome the loss from the short option.
Back Spread vs Ratio Spread
These are opposite strategies:
| Back Spread | Ratio Spread | |
|---|---|---|
| Structure | Sell 1, buy 2 | Buy 1, sell 2 |
| Profits from | Big moves | Target price |
| Max profit | Unlimited | Limited |
| Max loss | At long strike | Can be unlimited |
| Volatility | Long volatility | Short volatility |
Call Back Spread Setup
- Identify a stock you expect to make a big upward move
- Sell 1 ATM or slightly ITM call
- Buy 2 OTM calls at a higher strike
- Aim for zero cost or small credit entry
- Set a time horizon that includes your expected catalyst
Put Back Spread Setup
- Identify a stock you expect to make a big downward move
- Sell 1 ATM or slightly ITM put
- Buy 2 OTM puts at a lower strike
- Aim for zero cost or small credit entry
- Set a time horizon that includes your expected catalyst
Example: Put Back Spread
Stock XYZ is at $100. You expect it could crash on bad news.
- Sell 1 x $100 put for $5.00 (receive $500)
- Buy 2 x $90 puts for $2.50 each (pay $500)
- Net cost: $0
At expiration:
- Stock at $100: All options worthless. Result: $0
- Stock at $90: Short put worth $10 ($1,000 loss). Long puts worthless. Net: -$1,000 (max loss)
- Stock at $80: Short put worth $20 ($2,000 loss). Long puts worth $10 each ($2,000). Net: $0
- Stock at $60: Short put worth $40 ($4,000 loss). Long puts worth $30 each ($6,000). Net: +$2,000
When to Use Back Spreads
- Before earnings: If you expect a big move but are not sure of direction
- Binary events: FDA decisions, court rulings, election results
- Low implied volatility: Options are cheap, good time to buy extra
- Breakout setups: Stock consolidating before a potential big move
When to Avoid Back Spreads
- High implied volatility (options are expensive)
- Slow, grinding stocks without catalysts
- When you expect a specific price target (use ratio spread instead)
- Short time to expiration without a clear catalyst
Managing Back Spreads
- Close early if profitable: If you get a big move, take profits
- Close if stuck in the danger zone: If stock is near your long strike with time running out, cut losses
- Roll out if needed: If you need more time, roll to a later expiration
Track Your Complex Strategies
Pro Trader Dashboard displays your back spread payoff profile, Greeks, and breakeven points. See exactly where you profit and where you lose.
Summary
A back spread is a volatility strategy where you sell one option and buy two options at a further strike. You profit from big directional moves. The maximum loss occurs if the stock moves to your long strike and stops there. Back spreads are ideal before earnings or other events where you expect a significant move. They offer unlimited profit potential with defined risk, making them a powerful tool for volatility traders.
Want to learn more? Check out ratio spreads for the opposite strategy or straddles for non-directional volatility plays.