How to use back ratio spreads strategy in trading biased volatility

Asia's Tech News Daily

#experts columns, #stock market, #stock trading, #Technicals

Every few months there comes a time when there is lack confidence on direction but lot more conviction on volatility. In such times generally we do go on a backfoot and avoid to trade. However, one such strategy that comes in handy while trading such view is Back Ratio Spread.

A situation, where we have firm view on volatility that there is a very bright chance of movement, the choice of Bull or Bear for a Biased Volatility can be made easily with choice of instrument Call or Put.

Back Ratio Spread is a strategy where for Bullish Biased Volatility, we need to Sell a Call of the strike closest to the current underlying level and Buy not 1 but 2 lots of a higher strike Call. If we wish to trade Bearish Biased Volatility view, we choose Puts. Here, we need to sell a Put of the strike closest to the current underlying level and buy 2 lots of a lower strike Put.

What this ends up doing at the beginning is it reduces the premium outflow considering the Higher calls/Lower Puts cost lower then the Call/Put of strike close to current level.

The situation we have at hand generally in these times is expecting either a big move upon crossover of the known hurdle on up/downside or similar if not equally fierce but a move in opposite direction in case of a failure. This gives limited probability to the underlying meandering around the same level.

Now for the outcome, in case the breakout or breakdown does come along the Call/Put sold does start bleeding but after a brief move rising impact of the 2 bought Calls/Puts come into play. This will help as in case of big moves loss in 1 Sold Call/Put will eventually be compensated and favorable pay-off will created by 2 bought options against one sold.

On the flip side if there is failure, meaning we were expecting a big respite and there ends up a break down with a Call Back Ratio Spread or vice-versa (with Put Back Raio Spread). We will still be better off than the rest of the market.

This is because the premium out flow (net cost) of creating this strategy is always very small or at times one ends up getting some premium inflow. Eitherways, as long as our view on Volatility is correct, even being wrong will not have any big impact as the most one can lose in this strategy is the tiny premium paid while creating the strategy.

The only thing that could create negative pay-off is if the underlying stops and does not move. Our call on volatility goes wrong. The maximum loss can be difference between bought and sold strikes. This could hurt, but there is a remedy.

The trades shall be taken with a time stop loss of 2-4 sessions. In case if exit is not triggered within that time frame (big move does not come thru), exit the trade and wait for another trigger. This strategy could cost you dear in terms of time value with 2 Options Buy Vs 1 Sell if not exited within 2-4 sessions.

However, there is a caveat, the benefits of this strategy starts to fade as we go close to the expiry, hence advisable to avoid this trade in the final week of expiry. In such situation simple single option trades would do as the premiums must have come off due to limited time value remaining.

This is one of the safest strategies if executed along with entry (not close to expiry) and exit (within 2-4 sessions) criteria applied. Be vigilant of the limitations of it and make the most of any possible Volatility with a directional bias.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Internet Explorer Channel Network
Asia's Tech News Daily
News Related

OTHER NEWS

Tork Kratos finally launches on January 26. Here's what we know so far

Tork Kratos is set for launch on January 26 with bookings expected to begin in March. The electric vehicle (EV) segment seems to be powering on in India even as ... Read more »

World Economic Forum has new date for summit in Davos

Photo: ANP The organizers of the World Economic Forum (WEF) have set a new date for the international summit. It will now be held in the Swiss ski village of ... Read more »

Borrow, borrow, then also pay, pay

While he provided a number of loans to his own BV a year earlier, totaling €400,000. The tax authorities therefore also charge him for those 4 tons plus €35,000 in ... Read more »

Bitcoin Continues Down, Drops Below $39,000

Photo: ANP Bitcoin’s value continued to fall on Friday. The digital currency fell almost 9 percent to USD 38,950 (EUR 34,390). That is the lowest level in more than five ... Read more »

EU complaints against Russian lumber export restrictions not justified — Economy Ministry

Russian representatives "intend to give exhaustive clarifications in respect of applied measures" within the framework of consultations on the WTO floor, the ministry’s press service said Read more »

TotalEnergies withdraws from Myanmar

Photo: ANP Oil and gas group TotalEnergies is withdrawing from Myanmar due to the deteriorating human rights situation in the country. Since the coup by the military junta in February ... Read more »

RIVM: poor view of precise Tata Steel emissions, probably much higher

Actual emissions of metals and PAHs at the Tata Steel site are likely to be much greater than reported emissions. That is the conclusion of the RIVM in a new ... Read more »

A quarter of PostNL in the hands of Czech billionaire

Photo: ANP Czech billionaire Daniel Křetínský has again expanded his stake in PostNL. He now owns a quarter of the company. It is not clear what Křetínský’s further plans are. ... Read more »

French energy company TotalEnergies out of Myanmar

TotalEnergies withdraws from Myanmar. This French oil and gas group is doing so because of the deteriorating human rights situation in the country. The withdrawal should be completed in six ... Read more »

China hints at more measures against big tech companies

Photo: ANP China wants to further curb the influence of large technology companies in the country. The country also wants to eradicate the corruption that, according to the communist regime, ... Read more »

Euro countries' government debt still high

Photo: ANP The government debts of the euro countries have fallen slightly, but were still sky-high at the end of the third quarter of 2021. Total debt in the eurozone ... Read more »

Corona wiped out a large part of Dutch pop music income

Photo: ANP Dutch pop music has brought in much less money abroad due to the outbreak of the corona pandemic. Performances were canceled worldwide after the outbreak of the lung ... Read more »

Crucial professions are stirring quarantine rules

Photo: ANP More and more sectors are calling for the relaxation of the quarantine rules due to personnel problems due to infections. Various sector organizations of crucial professions, such as ... Read more »

RIVM: more harmful substances in the environment than Tata report explains

RIVM sees much higher concentrations of metals and carcinogens in the vicinity of Tata Steel than expected based on the company’s own emissions figures. That is the most striking conclusion ... Read more »

‘Energy companies hide variable rate contracts'

That says the Consumers’ Association, which has viewed the websites of 27 providers. By law, providers are obliged to make such a contract easy to find on the site. There ... Read more »

ICICI Bank Q3 Preview | Healthy growth likely across key earnings parameters with stable asset quality

ICICI Bank ICICI Bank, the country’s second-largest private sector lender, is expected to report healthy earnings growth across key parameters with falling provisions and stable asset quality, which is largely ... Read more »

Metal companies less positive due to material shortages

Photo: ANP SMEs in the metal sector have become significantly less positive about the expectations for the first quarter of 2022. The biggest challenges for the sector are the increased ... Read more »

Kroger workers' strike in Colorado ends after 10 days, tentative deal reached

More than 8,000 workers were on strike against the largest grocery store chain in the state seeking a pay increase, better health benefits and stricter Covid safety measures. Read more »

Beter Bed: no need for higher prices despite uncertainties

Photo: ANP Bed manufacturer Beter Bed, which also owns the Beddenreus chain and the mattresses of M line, sees no need to structurally raise the prices of its products due ... Read more »

Bitcoin slumps hard with tumbling to well below $40,000

On crypto platform Coindesk, bitcoin fell sharply to below $39,000, with a loss of more than 7% around 7 a.m. (Dutch time). Bitcoin is under pressure from the expectation that ... Read more »

AEX index heads for loss after Wall Street negative turn

Photo: ANP The Amsterdam stock exchange seems to open with a significant loss on Friday after the negative spin on Wall Street. The American tech gauge Nasdaq gave a profit ... Read more »

Employers can control absenteeism with these tips

Podcast Money CloseSickness absence is skyrocketing. Occupational health and safety services report increases of 30 to more than 50 percent. But what can you as an employer do to keep ... Read more »

RIVM: many more pathogenic substances in the air than Tata Steel says

“It is a big and remarkable difference,” says researcher Janneke Elberse of the RIVM. The ‘gap’ between expected and measured concentrations is mainly visible in metals and PAHs, or polycyclic ... Read more »

Brewers busy supplying the catering industry with beer again

The brewers therefore call on the cabinet to allow the catering industry to open its doors again next week, with a closing time in the evenings so that sales can ... Read more »

Brits worry about rising living costs

Photo: ANP British households are very concerned about the increasing cost of living due to high inflation. Consumer confidence fell sharply this month, reaching the lowest level since the low ... Read more »

Future Retail accuses Amazon of attempting to block its OTR scheme, asks US giant to repay dues to lenders

The independent directors of Future Retail Limited (FRL) have responded to Amazon’s letter dated January 19 and asked the e-commerce giant to pay Rs 3,500 crore to FRL so that ... Read more »

GM unveils new high-performance Cadillac Escalade V-Series SUV

2023 Cadillac Escalade V-SeriesCadillac DETROIT – General Motors will offer a new performance version of its flagship Cadillac Escalade SUV, adding to a growing lineup of high-power gasoline vehicles ahead ... Read more »

Google facing new fine for refusal to remove data prohibited in Russia — Court

Since early 2021, Google was repeatedly fined for failure to remove information prohibited in Russia Read more »

Mars gives M&M's a makeover to promote inclusivity

Candy maker Mars is giving a makeover to its six M&M’s characters as a way to promote inclusivity. The company said that it will provide a modern take on the ... Read more »

Wagamama owner warns bounce-back in consumer confidence after Plan B may take a while

The Restaurant Group revealed how its sales recovery was dampened by the restrictions and welcomed the announcement that they would be lifted. Read more »

Netflix gets hit on Wall Street after disappointing growth figures

Photo: ANP Netflix dropped significantly on Wall Street on Friday. Investors were unhappy about the disappointing number of new subscribers to the video streaming service. At 8.3 million, that fell ... Read more »

Spied by the boss: employers are violating privacy with CCTV

Employers simply misuse surveillance cameras to monitor employees. This is evident from conversations with 23 employees who were monitored by their boss and from dozens of complaints that are submitted ... Read more »

Think your home value is soaring? Talk to a farmer

The Associated PressThis 2018 photo shows Jeff Frank on his farm near Auburn, Iowa. Frank doesn’t feel rich, but simply based on the skyrocketing value of his land in northwest ... Read more »

Brewers are already busy being able to provide the catering industry with beer again

Photo: ANP Brewers are already busy providing the catering industry with beer again quickly. According to trade association Nederlandse Brouwers, preparations for the reopening of cafes and restaurants are in ... Read more »

Nippon India Mutual Fund files for artificial intelligence fund

Mutual funds have been filing thematic schemes that give investors exposure to futuristic technologies Nippon India Mutual Fund (NIMF) has filed for an artificial intelligence fund of fund with the ... Read more »

China's zero-Covid policy now looks like a 'burden' and it needs to reassess, IMF says

The International Monetary Fund's managing director said Friday that China's zero-Covid policy is increasingly looking like a “burden,” which is impinging economic recovery both domestically and for the world at ... Read more »

Will 40 years of house price inflation see Brits turn their backs on buying homes?

UK households are feeling the squeeze from high rents and rapid house price growth, but the pandemic has dampened demand in London. Read more »

PTC India sets up internal probe committee for NBFC arm; questions intent of independent director's resignation

PTC India said on January 21 that it has set up an internal committee to investigate the allegations made by three independent directors of its subsidiary PTC India Financial Services, ... Read more »

COVID-19: Wetherspoons chief 'breakdancing round the living room' as Plan B rules ease

The pub chain's chairman made the comments at the same time as a number of businesses reported signs of recovery following a hit to trading caused by the Omicron variant and measures designed to tackle it. Read more »

Warren Buffett's MidAmerican Energy plans $3.9 billion renewables project in Iowa  

This image from 2016 shows a wind turbine on property used by MidAmerican Energy's Eclipse Wind Farm in Adair, Iowa.Daniel Acker | Bloomberg | Getty Images A subsidiary of Warren ... Read more »
On free-english-test.com you will find lots of free English exam practice materials to help you improve your English skills: grammar, listening, reading, writing, ielts, toeic