BK - Bank Of New York Mellon Corp
OK, I yanked all the extra stuff off of this chart to show where I have been heading with my option trading, this is classic iron condor trade setup.
The green lines represent the profit making side of the trade as they are options sold to generate cash while the red are the safety options purchased to limit the loss in that direction should the price break out of the bracket.
As the prices stand right now I can sell a call for BK (November 32 call) for 35 cents and buy the November 33 call for 30 cents creating a net credit of 10 cents.
On the other side I can sell a November 26 put for 65 cents and buy the protection of a November 25 put for 50 cents for a credit of 15 cents.
If I want to make more profit I would have to buy calls and puts farther away but I would incur additional risk to do so, not in proportion with the possible gains though. The win rate of this strategy is higher if setup correctly and with the right stock or index. For example, changing to a November 34 call instead of the 33 would cost 20 cents, is the 10 cent credit worth the additional $1 risk?
The idea behind this is that the cash created by the credit is immediately deposited into the account as the sale is immediate along with the purchase. Seeing as somewhere near 75% of options expire worthless the entire strategy hinges on the fact that the options traded here all expire worthless but the more expensive ones made us some cash in the process.
In this example placing a 1 contract trade involves placing four separate trades to open the position. the net credit per position is 25 cents, for 100 shares that is $25. So at the November expiry that is the realized gain.
I know this example is not the most cost effective as the position will cost, through Questrade, more than $80. Not worth the $25. Adding size, perhaps 10 contracts, puts the cost up $36 due to Questrade's commission structure and bumps the profits up to $250. Better but the roughly $120 in commissions eats this up quickly. A stock with a larger price, and therefore a deeper option chain, would be a better choice for this style of trade as it justifies the commission costs due to larger credit creation with smaller positions... even though the option costs themselves are higher the payback is worth it. With the Optioneer system and Strikepoint trade broker the trades that I am likely to take will be in the $4500 range with $200-$400 profit (net) per trade. There are smaller, just under $1000 trades but even at that point the commissions are a larger consideration.
This strategy is not as speculative as straight option buying is and is more aimed at creating a regular cashflow as these trades are setup perhaps twice per month every month.
Jeff.
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