When Should These Option Trades Be Done?

When should a ratio or backspread be done, and what is the proper ratio of options for these spreads? Anyone trading these spreads should have some idea of where the market will be trading in the future. For example, buying a call spread is a bullish strategy, whereas selling a call spread is a bearish strategy, but selling a straddle may be neither, and is instead, a volatility play.

Anyone wanting to seriously trade options should have an idea of delta neutral option trading. This will be discussed later. Ratios or backspreads should not be done simply for credits, or because they require less cash outlay than a 1 by 1 spread.

Backspreads may be highly profitable when markets become volatile and trend strongly, which is exactly when ratios become unprofitable. If markets are quiet or trend slowly, backspreads become unprofitable and ratios become profitable. Neither spread is better but the profit and loss potential under varying times to expiration and volatilities should be thoroughly understood before trading them.

Many option spreads do not trade market direction, but instead market volatility. For example, buying a straddle should be profitable in a market which becomes highly volatile, irrespective of whether the market goes higher or lower. A ratio spread may make money in a calm market, irrespective of whether the market drifts higher or lower within a certain range.