Calendar Ratio Backspread by Jeff Neal
Would you be interested in a trading strategy that has limited risk, unlimited profit potential, is adjustment-friendly, and can profit in a sideways or breakout-type market? Of course you would! Here’s a look at the calendar ratio backspread strategy.
The calendar ratio backspread is an options strategy that can be constructed using either puts or calls, depending on the trader’s directional bias. While the
strategy may sound complex, using it is fairly simple.
CALENDAR RATIO BACKSPREAD DEFINED
As the name suggests, the calendar ratio backspread combines a standard ratio backspread and a diagonal options strategy. For example, when using calls, the standard ratio backspread involves purchasing calls with a higher strike price and selling fewer calls with a lower strike price at little or no cost — or even a credit. The ratio of calls purchased to those sold is generally less than 0.67. The most common ratios are 1 to 2 and 2 to 3. This means buying two calls offset by selling one call, or buying three calls against selling two.