Back Spread Strategy
Learn back spreads to profit from big moves. Buy more options than you sell, often for credit, with unlimited profit potential in the long direction.
What is Back Spread Strategy?
Back Spread Strategy is a strategy where you sell one option and buy multiple options (usually 2) at a different strike, creating a position that profits from large directional moves.
Back spreads are inverse ratio spreads - you want big moves, not sideways action. Often entered for credit or small debit, making them attractive volatility plays.
TL;DR - Quick Summary
Back Spread = Sell 1 option + Buy 2+ options. Example: Sell 1 call at $100, buy 2 calls at $105 for credit. Profits unlimited if stock rallies hard. Max loss if stock stays at short strike. Best deployed in low IV before expected volatility expansion.
What is a Back Spread?
A back spread (also called a reverse ratio spread) is an options strategy where you sell fewer options at a strike closer to the current price and buy more options at a strike further away. It's the opposite of a traditional ratio spread.
The most common version is the call back spread: sell 1 lower-strike call, buy 2 higher-strike calls. This creates a position that profits from large upside moves while having limited downside risk.
Back spreads are typically established for a credit or near-zero cost, making them attractive when you expect a significant move but want to limit your capital at risk.
Key Characteristics
- ✓ More long options than short (usually 2:1 ratio)
- ✓ Profits from large moves in the direction of the long options
- ✓ Limited risk between strikes
- ✓ Established for credit or small debit
- ✓ Negative gamma near the short strike, positive gamma beyond
When to Use a Back Spread
1. Expecting a Large Move
You believe the stock will make a significant move beyond the long strikes, but you're not certain of the exact direction (if using both call and put back spreads).
Example: Stock at $100, expecting move to $120+ on earnings announcement.
2. Low Implied Volatility
IV is low but you expect it to expand. Back spreads benefit from volatility expansion since you're net long vega (more long options than short).
Example: IV rank below 20, expecting catalyst to spike volatility.
3. Want Unlimited Profit Potential
Unlike credit spreads or iron condors, back spreads have unlimited profit potential beyond the long strikes (for call back spreads upward, put back spreads downward).
Example: Bullish on tech stock with new product launch—want to capture unlimited upside.
4. Limited Capital at Risk
You can often establish back spreads for a credit or small debit, limiting your maximum loss while maintaining large profit potential.
Example: Receive $50 credit to enter position with max risk of $450.
5. After Accumulating Stock
Already own stock and want to add leveraged upside exposure without additional capital—collect credit from the back spread.
Example: Own 100 shares at $95, add call back spread for credit to gain 200 delta above $105.
How to Set Up a Back Spread
Call Back Spread Example
Let's set up a call back spread on a stock trading at $100:
| Position | Strike | Type | Premium |
|---|---|---|---|
| Sell 1 | $100 | Call | +$6.00 |
| Buy 2 | $105 | Call | -$3.00 each = -$6.00 |
| Net Credit/Debit | $0.00 (even) | ||
Position Greeks
- • Delta: Positive when stock is above $105, negative between $100-$105
- • Gamma: Negative near $100-$105, becomes positive above $105
- • Vega: Positive (net long vega—benefits from IV increase)
- • Theta: Slightly negative initially, becomes more negative near expiration if between strikes
Strike Selection Tips
- ✓ Short strike: At or slightly above current price
- ✓ Long strikes: One or two strikes further OTM
- ✓ Wider spreads: Lower max risk, more capital efficient
- ✓ Tighter spreads: Easier to get credit or smaller debit
Profit & Loss Scenarios
Scenario 1: Large Move Beyond Long Strikes
Stock moves to $115 at expiration
- • Short $100 call: -$15.00 loss
- • Long $105 calls (2x): +$10.00 each = +$20.00 gain
- • Net profit: +$5.00 per share = $500
Result: Profit increases $100 for every $1 move above $105 due to the extra long call.
Scenario 2: Stock Between Strikes (Worst Case)
Stock at $103 at expiration
- • Short $100 call: -$3.00 loss
- • Long $105 calls (2x): expire worthless = $0
- • Net loss: -$3.00 per share = -$300
Result: Maximum loss occurs when stock is at the long strike price at expiration.
Scenario 3: Stock Stays Below Short Strike
Stock at $98 at expiration
- • Short $100 call: expires worthless = $0
- • Long $105 calls (2x): expire worthless = $0
- • Net result: $0 (breakeven if entered for even)
Result: If entered for a credit, this is a profit; if for a debit, this is your max loss.
Scenario 4: Small Move (Slightly ITM)
Stock at $101 at expiration
- • Short $100 call: -$1.00 loss
- • Long $105 calls (2x): expire worthless = $0
- • Net loss: -$1.00 per share = -$100
Result: Small losses occur on modest moves in the expected direction.
Maximum Risk Calculation
Max Risk = (Strike Width × # of Spreads) - Net Credit Received (or + Net Debit Paid)
For our example:
- • Strike width: $5
- • Number of spreads: 1
- • Net credit/debit: $0
- • Max risk: $5.00 per share = $500
Max loss occurs at the long strike ($105) at expiration.
Managing a Back Spread
1. Take Profits on Big Moves
If the stock makes a significant move in your favor and you're showing a good profit, consider taking it off. Don't wait for expiration—capture the gain while volatility is high and time value remains.
2. Roll Out for More Time
If the stock is moving in the right direction but needs more time, roll the entire spread to a later expiration. This extends the runway for your thesis to play out.
3. Adjust on IV Collapse
If IV drops sharply (IV crush after earnings), your long options lose value faster than your short option. Consider closing early to prevent further losses, or adjust strikes.
4. Close Before Expiration if Between Strikes
If approaching expiration with the stock between your strikes (max loss zone), close the position to avoid pin risk and potential assignment complications.
5. Convert to Spread if Wrong
If the stock moves against you (down for call back spread), you can close one of the long calls to convert it into a standard vertical spread, reducing vega exposure and limiting losses.
⚠️ Assignment Risk
If your short call goes deep ITM, you face early assignment risk (especially around ex-dividend dates). Monitor positions closely and be prepared to close or roll to avoid assignment.
Advanced Techniques
Put Back Spreads (Bearish)
The bearish equivalent: sell 1 higher-strike put, buy 2 lower-strike puts. Profits from large downside moves with limited upside risk. Great for expecting a crash or panic selling.
3:1 or 3:2 Ratios
Instead of 2:1, try 3:1 (sell 1, buy 3) or 3:2 (sell 2, buy 3) for different risk/reward profiles. Higher ratios increase profit potential but also increase max loss.
Pairing with Directional Positions
Combine with long stock or LEAPS for a layered approach. The back spread adds leveraged exposure while the underlying position provides downside protection or income generation.
Using Different Expirations
Sell near-term option, buy longer-term options at different strikes. This creates a diagonal back spread with different time decay characteristics.
Common Mistakes to Avoid
1. Holding Through Expiration
Don't let back spreads expire with stock between strikes—you'll take max loss and face assignment complications. Close a few days before expiration.
2. Using in High IV Environments
Back spreads work best when IV is low and expected to expand. Entering when IV is already high leaves you vulnerable to IV crush.
3. Ignoring the Max Loss Zone
Traders focus on unlimited profit potential and forget max loss occurs at the long strike. Always know your max risk before entering.
4. Wrong Ratio Selection
Using too aggressive ratios (4:1, 5:1) magnifies losses if you're wrong. Stick to 2:1 or 3:2 ratios for more balanced risk/reward.
5. Not Adjusting on Small Moves
If the stock only moves slightly and you're in the loss zone, adjust or close. Don't hope for a miracle—back spreads need large moves to profit.
Key Takeaways
- ✓ Back spreads profit from large moves beyond the long strikes with unlimited potential
- ✓ Sell fewer, buy more—typically 1:2 ratio (sell 1, buy 2)
- ✓ Maximum loss occurs at the long strike at expiration—know this number
- ✓ Best in low IV environments when expecting volatility expansion
- ✓ Net long vega—benefits from increasing implied volatility
- ✓ Close before expiration if between strikes to avoid max loss and pin risk
- ✓ Can be established for credit or small debit, limiting capital at risk
- ✓ Assignment risk on short option if deep ITM—monitor closely
- ✓ Requires large moves—not for small, choppy price action
- ✓ More complex than basic spreads—understand Greeks before trading
Start Trading Back Spreads
Use ApexVol's professional tools to analyze, build, and visualize back spreads. Calculate Greeks, max loss, profit potential, and test different scenarios before risking capital.
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