http://hamzeianalytics.com/pow_regist... - The Admiral, a former CBOE Designated Primary Market Maker, shows how to design a put ratio backspread for a stock that one believes has a potential for a big decline. To take it a step further, once the put ratio backspread is constructed, the Admiral goes through an exercise of changing the expected implied volatility to see how the backspread may perform in different volatility environments. The example stock used is Verizon (VZ)
This an excerpt from "Trade Options like a DPM Webinar #7: Backspreads" -http://hamzeianalytics.com/pow_regist...
"BACKSPREADS" OPTIONS WEBINAR DESCRIPTION (NOVEMBER 11, 2010, 1800 CT)
A type of options spread in which a trader holds more long positions than short positions. The premium collected from the sale of the short option is used to help finance the purchase of the long options. This type of spread enables the trader to have significant exposure to expected moves in the underlying asset while limiting the amount of loss in the event prices do not move in the direction the trader had hoped for. This spread can be created using either call options or put options.
ABOUT "THE ADMIRAL"
The featured speaker, whom we affectionately call "The Admiral," was a Designated Primary Market Maker (DPM) on the floor of the CBOE for five years. Although we're not using his real name (so don't ask!) suffice it to say that we consider him to be one of the most knowledgeable option traders on the planet. As a floor trader in the '80s and '90s he did the opening options rotation for 5-25 stocks the old-fashioned open outcry way—meaning he opened each option strike price for each of these stocks within the first 30 minutes of trading, both calls and puts.
That meant he had to price more than 500 option strikes, plus as a market maker he traded and kept the markets current. As a DPM, technology brought forth auto-quoting of option series, but pricing of those quotes remained his responsibility. Trading 1 million shares of stocks and 50,000 options contracts was a normal day for him. In 27 years at CBOE, he has traded through the crash of '87, the smaller crash of '90 and the tech bubble in 2000. He has traded three-digit volatility and seen every possible market environment imaginable. So, if you're going to learn options, it might as well be from the very best.