...and it slips through my fingers.

I made some headway on the zero risk trade idea and figured that I had better tear it down and start from a different angle. I was drawing risk charts and had setup a spreadsheet to calculate the final profit using the various quotes at various strikes. Something wasn't adding up and I couldn't put my finger on it.

So, here is a breakdown of my start from scratch with some basic spread premises.

A bear call spread sells premium on the lower strike call while buying protection with the higher cheaper strike call, both OTM. If the price goes down it retains full value, if the price rises through the spread it loses value up to the credit amount above the lower short strike then creates loss right up to the higher strike.

The Bull put spread sells premium on the higher strike put while buying protection with the lower cheaper strike put. If the price goes up it retains full value, if the price drops through the spread it loses up to the credit amount below the higher short strike then creates a loss right down to the lower strike.

Both retain value as long as the price remains contained below or above the respective strike values and the profit and loss is fixed in both cases. Tie them together and they raise the profits as long as the price remains contained within the bracketed short strikes. The iron condor.

A debit call spread (bullish) that straddles the price buys long opportunity with a lower ITM strike and sells premium with a higher OTM strike. The short strike serves to reduce the total cost of the trade and remains profitable as long as the price does not cross this higher strike. The long option has Intrinsic Value off the start and gains value as the price rises. This spread trade serves to reduce the up front cost while limiting profit to the difference between the short strike and the long strike less the cost of the initial long strike plus the short premium.

A debit put spread (bearish) that straddles the price buys short opportunity with a higher ITM strike and sells premium with a lower OTM strike. The short strike serves to reduce the total cost of the trade and remains profitable as long as the price does not cross the lower strike. The long option has IV off the start and gains value as the price rises. This spread trade serves to reduce the up front cost while limiting profit to the difference between the short strike and the long strike less the cost of the initial long strike plus the short premium.

In these debit spreads the profits increase as the price moves up for the call spread and as the price moves down for the put spread and when taken individually they are not capped with regard to profits but are capped for losses.

Assume that the price of the security is in the middle of an arbitrary range, say 110 to 120 and the price is 115. Assume no commissions and no Extrinsic Value for the moment, this is not reality but serves a conceptual purpose.

Buying the 110 strike call which is $5 ITM and selling the 120 strike call for $0 (OK, pretend for now)
Buying this debit call spread cost $5 overall.

Buying the 120 strike put which is $5 ITM and selling the 110 strike put for $0
Buying this debit call spread cost $5 overall.

Buying both spreads cost $10 overall.

Again, with no EV if the price moved down to $112 the call spread would be worth $2 and the put spread would be worth $8. Take this to expiry and both spreads are worth combined $10

Price moves to $110 the calls are worth $0 and the puts are worth $10
Price moves to $105 the calls are worth $0 and the puts are worth $15...but there is a short put at $110 limiting the profit to $10 as it will be executed for that strike. The same thing happens as the price moves up to and past the short call strike.

OK, with no commissions and no EV we have a zero sum game and no matter where the price goes it is ALWAYS a zero profit and zero loss. The only factor then becomes premiums sold to create profits while using the opposing spread trades to cancel each other out in the case of a sharp move against one side of the trade.

Using the same numbers we can ignore the IV completely as it cancels out.

Now, using only the EV we can concoct a trade that creates premium selling opportunity by taking advantage of the disparity between premium on OTM option against the premium on ITM options.

Sell high and buy low takes on new meaning as this is done simultaneously.

Buying the 110 strike call which has $0.50 EV and selling the 120 strike call for $1 EV
Buying this debit call spread created a credit of $0.50 overall.

Buying the 120 strike put which has $0.50 EV and selling the 110 strike put for $10

Buying this debit call spread created a credit of $0.50 overall.

Buying both spreads created a credit of $1 overall. Seeing as no matter what the price does from start to finish this credit will remain intact as long as the trade is left to expire. The trouble is that the long options will be exercised as they are ITM and I would have no intention of letting that happen as I would not want to own the underlying stock so I will have to close the trade incurring more commission costs.

So, double commissions.

Checking the actual pricing of options to do this turns out that creating a net credit is very tough to do. I would need to have cheaper commissions, and they are already cheap for the retail market. I would also have to have access to better bid/ask spreads as this slippage will kill any profits.

Basically, while the trade has a fixed known profit/risk potential no matter the underlying price activity just the execution and costs are enough to both chew up profits and create losses right up front.

Sadly, this trade has no value without finding some large pricing discrepancies... which I do not have data access to try to even start to find.

Oh, well.

Jeff.