Reverse Back Spread

BySmart Trader August 21, 2025 0 Comments

The Reverse Back Spread (or Short 1×2 Ratio Spread)

If the regular back spread is all about betting on big moves and volatility expansion, the reverse back spread is the opposite.

It is a strategy designed for traders who expect the underlying to stay quiet and volatility to decline.

What It Is

A reverse back spread is essentially the mirror image of the back spread.

Instead of selling 1 option and buying 2, you buy 1 option and sell 2 options of the same type (calls or puts) at different strikes but with the same expiration:

  • Reverse Call Back Spread: Typically used when you expect the underlying to stay flat or fall.
  • Reverse Put Back Spread: Typically used when you expect the underlying to stay flat or rise.

How the Reverse Back Spread Works

Take the reverse call back spread:

  1. Buy 1 at-the-money call.
  2. Sell 2 out-of-the-money calls at a higher strike.

Reverse Back Spread with Calls

This position benefits if the underlying drifts sideways or modestly down. But if the market rallies too hard, the short calls snowball into theoretically unlimited risk.

The reverse put back spread works the same way in the opposite direction:

  1. Buy 1 at-the-money put.
  2. Sell 2 out-of-the-money puts at a lower strike.

Reverse Back Spread with Puts

Here, you benefit from stability or a modest rise in the market, but you’re exposed to heavy downside risk if prices collapse.

Payoff Profile

  • If the market stays near the bought strike, small gains are possible.
  • If the market moves slightly against you, the premium structure usually still leaves you with a profit.
  • If the market makes a big move in the wrong direction, losses can be very large, because you’re short extra options.

Why Use It

Traders employ the reverse back spread when:

  • Implied volatility is high, making option premiums rich.
  • They expect volatility to decline.
  • They have a strong conviction that the underlying won’t make a big move in one direction.

Risks

Unlike the regular back spread, the reverse version has unlimited loss potential on one side. This makes it suitable only for advanced traders who understand and accept those risks.

So, in short: the back spread is like buying a lottery ticket for volatility, and the reverse back spread is like selling insurance on volatility and praying nothing catches fire.