Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks

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The backspread trade is cheap to initiate, possibly even providing an initial credit. In comparing the previous examples, note that to have an initial credit, the strike prices of the long and short options must be further apart.

These trades have unlimited potential to profit from large moves in the stock price. If the strike prices of the long and short options are far apart, a larger move in the stock price is required to produce a profit.

Unlike most spreads, the backspread trade can achieve a maximum profit if the big move in the stock price occurs before expiration.

The maximum loss in a backspread trade occurs at expiration when the stock price coincides with the strike price of the short option(s). This loss is always greater ...