Ratio Backspreads on Crypto / Solana example on Deribit

Updated: 20 October, 2022 seen 12

Backspread is an advanced type of options trading in which a trader buys more call or put options than they sell. The backspread trading plan can focus on either call options or put options on a specific underlying investment. 

I was first introduced to the ratio back spread options by an Italian fellow option traded (Ciao Massimo) a few years ago. I should say I like the theory, but in the practice, I cannot report (yet) significat results.

In the past, I had tried my luck with put and call ratio bascpreads on stocks and ETF's but today decided to look at how ratio backspreads help mitigate risk. I was exchanging email with my trader friend and here I will paste my loud thinking notes:

Call and Put ratio examples for Solana coin on the Deribit platform

I bought 100 SOL coins at 29.36 and sold call and put backspreads with expiry on October 28 ( what is your optimal expiry?)

here is the trade setup:

  • sold 100 SOL-28OCT22-30-C @0.026
  • bought 200 SOL-28OCT22-32-C @0.010

Kept premium: 0.6 SOL

what happens next: I have actually bought 100 coins at 29.36, I don't care much about the call side, say it will expire at:

  • $30 - excellent, my 100 coins now are worth $3,000 + I have made 0.6 SOL premium $18  or (0.6*30). Total gain of $82 / or about 2.8% in 8 days
  • $31 - not so good, but I still make money, my 30 call side gets assigned (need to pay the difference in crypto = 1/31 = 0.0323*100, I'm left with 100-3.23 or 96.77 coins, but as the new price is $31, I'm left with $2,999.87. I still make $63.87
  • $32 - not so good, but also I still make some money, my 30 call side gets assigned (need to pay the difference in crypto = 2/32 = 0.0625*100, I'm left with 100-6.25 or 93.75 coins, but as the new price is $32, I'm left with $3000. I still make $64
  • $33 - again good, my 30 call side gets assigned (need to pay the difference in crypto = 2/32 = 0.0625*100) but I gain on the 32 sides (1/33 or 0.03) I'm left with 100-6.25+3 or 96.75 coins, but as the new price is $33, I'm left with $3,192. I already make $256
  • $35 - my 30 call side gets assigned (need to pay the difference in crypto = 2/32 = 0.0625*100) but I gain on the 32 side (3/35 or 0.0857) I'm left with 100-6.25+8.5 or 102.25 coins, and with the new price of $35, I'm having $3,578. I already make $642

There might be some small calculation errors in the examples above, as I'm doing them on paper  / in my mind - but more or less this is the scene. Also, it looks like the acceleration starts at $34

As you can see call side is protected and in any outcome, I will make a dollar profit, even with a loss in actual coins.

I'm rarely concerned about the call side - you always make money, when the market goes up. I'm more concerned about not losing the money invested, so I sold also a put ratio back spread

here is the trade setup

  • sold 100 SOL-28OCT22-29-P @0.031
  • bought 200 SOL-28OCT22-27-P @0.014

Kept premium 0.3 SOL

what happens next:

  • $29 - good, my 100 coins now are worth $2,900 + I have made 0.3 + 0.6 SOL premium $26.1 or (0.3*29). Total loss -$10 / loosing
  • $28 - not good, my 29 put side gets assigned (need to pay the difference in crypto = 1/29 = 0.0344*100, I'm left with 100-3.44 or 96.56 coins, with the new price of $28, I'm left with $2,703. Total loss: $-233 / loosing
  • $27 - bad, my 29 put side gets assigned (need to pay the difference in crypto = 2/29 = 0.0689*100, I'm left with 100-6.89 or 93.11 coins, with the new price of $27, I'm left with $2,513. Total loss: $-433 / loosing
  • $26 - bad, my 29 put side gets assigned (need to pay the difference in crypto = 2/29 = 0.0689*100, but I gain from $27 (1/26 or 0.384) I'm left with 100-6.89+3.84 or 96.95 coins, with the new price of $26, I'm left with $2,520. Total loss: $-416 / loosing
  • $25 - bad, my 29 put side gets assigned (need to pay the difference in crypto = 2/29 = 0.0689*100, but I gain from $27 (2/25 or 0.08) I'm left with 100-6.89+8 or 101.11 coins, with the new price of $25, I'm left with $2,527. Total loss: $-409 / loosing
  • $24 - bad, my 29 put side gets assigned (need to pay the difference in crypto = 2/29 = 0.0689*100, but I gain from $27 (3/25 or 0.12) I'm left with 100-6.89+12 or 105.11 coins, with the new price of $24, I'm left with $2,522. Total loss: $-414 / loosing
  • ...
  • $20 - bad, my 29 put side gets assigned (need to pay the difference in crypto = 2/29 = 0.0689*100, but I gain from $27 (7/25 or 0.28) I'm left with 100-6.89+28 or 121.11 coins, with the new price of $20, I'm left with $2,422. Total loss: $-514 / loosing

Seems there is no point in selling put ratio back spread in such a situation, as smarter would be just to buy a protective put at 24 or alternatively sell just covered call on 30 and buy puts on 27

Interested to learn more? I'm offering paid - online live course Selling Covered Call Options on Crypto (BTC/ETH/SOL)

Disqus