“Here we go again on our own!!!” Sorry, about the Whitesnake reference there, it just kinda popped into my head. That statement can be somewhat true when it comes to trading, typically we are on our own when we are placing trades, researching trades and just about every other aspect of trading but that is exactly why we have this blog and the Tackle community, it is so that we can collaborate together and bring a more rewarding experience to the game we so love!

On to the show for this week. Last week we went through one of my favorite trades, the diagonal spread. There are many reasons I like the diagonal spread but I think the best reason is the cash flow it can provide in addition to an opportunity to profit from directional movement. This trade can take the concept of the covered call and enhance it by reducing risk and in turn pumping up the ROI. You can see that just like the phases blend into one another so can different types of trades.

This week we are going to discover a different kind of spread. This weeks trade is a horizontal spread, meaning the two options we are going to use are in the same expiration or another way to put it is in the same serial. This weeks trade is the back ratio spread. This trade is less forgiving than that of the diagonal spread and can be thought of as a more speculative trade. The back ratio needs movement to be successful. If the movement is in the direction that the trader predicts then the payoff can be similar to that of a long option. If the movement is in the opposite direction then the damage can be quite minimal or even profitable depending on how the trade is setup. There is an inherent danger in this trade if it settles at expiration at the long strike price. This is called strike risk and therefore it requires attention to be paid to this trade. This is not a set it and forget it type trade.

This trade, like long options, needs time to be right. We need to give this trade at least two months plus the amount of time we expect it to take to reach our target. We are going to sell one option and buy two of another usually the strike next to one we sold. If you choose to go further out between strikes then the risk on the trade increases and this should be done with extreme caution. When choosing strikes one should know that the ATM option always gets the most movement and therefore the short strike shouldn’t stray too far from the ATM strike. Now, that we have explored the parameters of this trade let’s take a look at one in this weeks video.

Also, in this weeks video, we will go over the mock trades and see what’s shaking. We are cruising through the phases and we are going over the main trades in each phase, of course, this is not all the trades in each phase but the more popular ones. We will be wrapping this series up shortly and then we are going to show some love to our friends from the great white north and we will be doing a series on the best brokers that can be used outside of the US. There are some specific challenges presented to traders that reside outside of the US and we are going to do our very best to present some options to our trading community north of the border.

Trade Well All

Coach Holmes