QUESTION

I would like know about ratio back-spreads. Is it possible to make a living using these? I like the protection offered on the wrong side.

Thanks, Milton

ANSWER

Milton,

There are many good strategies out there. What you need to realize is that there is no right strategy that works for all situations.

Depending on the situation, any of the strategies will be or could be the right one. They are all good strategies when used properly and at the right time. There is a right time and a right place for a ratio backspread.

My only fear with ratio spreads is that people like yourself get on the wrong side of the ratio. As a retail investor, I do not recommend being net short options so I would not be in favor of you selling more than you buy. I am okay if you are going to buy more than you sell but not vice-versa.

The one thing I do want you to be aware of is that we do not look for strategies then fit opportunities into them. By doing this, you are putting the cart before the horse. When you start looking for strategies to force opportunities into, you set yourself up for consistent problems because suddenly, every opportunity looks to be a perfect fit for your strategy, even when you have to force. Forced trades very infrequently turn out to be winners.

What you should be doing is finding opportunities, THEN applying the proper strategy best suited to take advantage of the opportunity you have just identified. In this way, you will always have the right position on at the right time. Having the right position on at the right time makes that position a good position right then and right there.

Hope this helps.