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Trading Commodities, Commodity Options and Currencies (Collection) by Carley Garner, Paul Brittain

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chapter 8The Other Ratio Spreads

As mentioned, ratio spreads come in various forms. A version that we less commonly use is the back spread. This trade involves the sale of a close-to-the-money option and the purchase of two options of the same type with distant strike prices. This trade is a mirror image of the previously covered ratio spreads.

A back spread comprises of either calls or puts, but not both, in the same expiration month. Because there isn’t a naked, or uncovered leg in the spread, the trader is not liable for theoretically unlimited losses. Instead, a back spread trader faces limited risk and unlimited profit potential.

The trade can be executed as a credit (you collect more premium on the short option than you pay for ...

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