There is something that has me wondering.  If you do a trade such as Iron Condor that has multiple components (4) or a vertical spread (2) can you change or adjust just one or two of those components?  You’ve talked about adjusting one side of an Iron Condor by using a butterfly I think.  Anyway, it made sense to me.  But how does the broker know, when you do the adjustment, that you are adjusting a particular trade and not putting on an additional trade.  Maybe it is different depending on your broker.  I actually did the aapl iron condor that your wife put on, just for fun and because it looked like a sure thing.  I called my broker, Etrade, to ask how I’d make an adjustment with the butterfly if it came to that.  He said I’d have to call him and let him do it, at no extra charge.  Is this the case with all brokers or should I be able to do it online?
      I realize that Etrade is not an OPTIONS BROKER, but that’s who I have for now and they have most of the tools that I understand and it is easy to make a trade, at least so far.  And they are a lot cheaper than thinkorswim as far as I can see.  I’ve started the account process at thinkorswim and at Trade King but haven’t funded either yet.  I won’t put money into either of  them until I’m sure I understand their order processing program.  It took me hours to figure out the process at thinkorswim today on their paper trading program.  I have no idea how I’d make an adjustment on an Iron Condor.  I guess my big problem is that ... I don’t know what a real options broker is capable of and what kind of service I should expect from them. 
     I like charts of the underlying stock, ETF, or index.  Etrade has a great chart and I can overlay an options chain and the order entry window all in one frame.  It’s great.  Trade King doesn’t offer charts unless you have $25K with them.  Thinkorswim, well the order entry process isn’t near as easy as Etrade, but everyone seems to rave about it.  I’m paying Etrade $7.99/trade plus $.75/contract.  I think that’s about half thinkorswims rate.
    I’ve done a lot of  research of brokers and have read the blogs on your website.  I’m just really in a quandary about brokers.  I’m happy with Etrade so far.  I’ve done covered calls, put credit spreads and some LEAPS with them with no problem.  Oh yes and your wife’s Iron Condor which I’ve already gotten out of with a small profit.  I want to be able to do the trades exactly as you recommend, adjustments and all and I think I can make it work on Etrade without the commission killing me.  (Am I missing something on commissions?)  I think I will stick with Etrade for another month or so and continue to try to figure out thinkorswim and Trade King.  The only thing Etrade lacks is the different options calculators.  But I’m thinking that I may not need those if you’ve already figured that out for me. (But it would be nice to see where you get your numbers.)
     I’d appreciate your input on this and I promise I won’t bug you like this too much.  I know you must be busy enough with so many other thing, not to mention the next great trade.

thanks

My Response:

Help In Choosing An Option Broker is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Trademonster and Interactive Brokers.

Trademonster is a newer broker but is focused on customer service and growing their customer base by providing lots of trading tools, resources, and education.

Interactive Brokers is a larger broker used by major market players.

OptionGenius members can sign up to autotrade our service through these brokers right away. If you already have an OptionGenius membership just choose a broker and visit their autotrade page for more info on how to set up.

Note: to autotrade with Interactive Brokers, you have to go through a separate company called Global Autotrading. This company charges a monthly fee for autotrading. OptionGenius does not charge any money – it is a free service for our members.

Our other autotrade partners are still doing great for our members.

Eoption and OptionsXpress.

For more information on what Autotrade is and how it works, visit: http://www.optiongenius.com/Autotrade.html

New Autotrade Partners Added! is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

OptionGenius.com has just reached an autotrade agreement with the broker OptionsXpress. We are already autotrading with eoption.com but adding a second broker to the mix gives members more options (Pun intended). Many of you probably already have accounts at OptionsXpress.

I’ve written about autotrading before but in case you don’t know what it is, autotrading is where a broker executes trades for you in your account on your behalf. So if I send out a new trade or a trade alert and you are on vacation, or at work, or driving the kids to school, etc you don’t need to worry about missing the trade. The broker will take care of it for you.

OptionsXpress is a very friendly option broker and has recently bought Optionetics so they are very strong in the educational component as well.

I hope this will be a long and happy relationship for all involved.

For more info on autotrading and what you need to do to sign up, please visit:

www.optiongenius.com/Autotrade.html

Now Autotrading with OptionsXpress is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

When you say, to buy back the option before, the expiration date, don’t you incur additional costs, that reduce your profits even further ?

Good question. In some trades like the Calendar spread you have to buy them back because you don’t want to get long the option. But in an iron condor or credit spread, you can wait and let the options expire. If you buy them back you incur commissions plus whatever you are buying it back for.
 
In many cases it is a question of risk vs cost.  if there is a lot of time left before expiration, you are probably best buying the trade back in case there is a move against you and you end up losing money. On the other hand if you let it expire you can save a few dollars and maybe 1 or 2% points on the trade. 
 
So lets say you it will cost you $20 to buy back a trade, but if the trade moves against you, you could lose $1,000. Do you take your profits or hope for that last $20. Even if the trade moves just once against you in 4 years, you still lose money.
 
Make sense?

Here is a real life example.

On October 12, 2009  I did a credit spread on AAPL. I Sold the Nov 165 Puts and Bought the Nov 160 Puts as protection for a credit of .50 on each spread. There were about 40 days to expiration.

On this trade if the puts expired worthless I would make 11.11% before commissions. (Credit of $50 divided by max loss of $450 per spread = potential return of 11.11%) 

Well AAPL just had earnings yesterday and the stock shot up to about 200 today. This morning, I was able to buy back the credit spreads at .07 each.

So I made .43 per credit spread in 8 days.  That is 9.5%

Why did I buy the spreads back? I could have let them expire worthless. If I did i would make another .07 per spread. But there is still 31 days left to expiration. So I decided to make my profit and money and look for another trade.

Who knows? Maybe AAPL will settle down and I will sell another credit spread on it this month for more credit. Or maybe I will do something else. All I know is that I don’t want to risk losing $450 per spread (anything can happen and APPL could drop in price) to make another $7 per spread.

Yes I did pay the commissions by buying the spreads back. But on each spread I paid $2.50 in commissions.  $2.50 going in and $2.50 coming out which is a total of $5 in commission per spread. So instead of mkaing $43 per spread I made $38 per spread which is still 8.44%.

(That’s why having an option friendly broker is so important. I pay $1.25 per option with no trip charge. If you are paying $10 plus $1 per option or some other crazy commissions then you ae playing a game that is stacked against you. Get a better broker.) 

In my opinion, take off your spreads when they are close to worthless if there is alot of time left. Take your profits. Everyday your money is out of the market is a day you cannot lose it.

This is not to say I never let my spreads go to expiration. Sometimes I do, but not too often on a highly volatile stock.

When Do I Buy Back A Credit Spread? is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

 
Options: What Your Broker Doesn’t Want You to Know

Right off the bat, I want to say this isn’t about “that dirty rotten stinkin’ bad old broker.”  Brokers and money managers, please know, I’m just going to slowly make our readers understand the things that motivate your actions — other than just making the client money.

One of those things includes making yourself money.  Yes, you have a right to do what you can to get paid, too!  It’s a free market and a free country and I won’t hate the players — but I will hate the game. …

Options Can Buy Your Freedom

Ever since I started trading options, my life got a lot easier. And that’s not only because I’ve been making all kinds of money doing it, but because I don’t have to deal with all the stress. 

It really comes down to living the lifestyle I want to live. If your broker, your money manager, or whatever professional you rely on is keeping you from doing that, then it’s time for me to step in here and “pull some cards,” so to speak. 

I worked on Wall Street from 1995 to 2004, and what I’m going to tell you is not my opinion; it’s fact.  They will usually try to discourage you by saying options are risky or that you don’t qualify to trade them. 

Investment professionals who know options, trade options — not stock.  And they want you to trade stock, not options. 

Why?

1.  Your investment professionals, as individuals and as corporations, are running a business and want high profit margins. 

This means they want to get the best bang for their buck by spending as little time as possible explaining things to you, or having someone explain it to them so they don’t sound foolish or make mistakes.

Options trading is just one of those things where you keep finding out more and more — at every corner you turn, it blows you away and you want to know more.  Ask anyone who took the initial steps of learning about options; they will probably say the exact same thing.

This puts a burden on the investment professional because you might be a Level-II options trader (i.e., you can use more-advanced strategies in your account), and given what you realized you can do so far, you start to ask lots of questions about additional strategies. 

Why open that can of worms as an investment professional?

2. Options trading requires you to commit less capital to an investment even though you can make the same profit, dollar-wise, as you would make on the stock, index or Exchange-Traded Fund you’re trading. 

In fact, you can make a lot more when you’re right about what you think a stock or ETF will do, while risking a lot less.   I’ll show you how in a minute (as I promised to last week). 

But why does this cause an investment professional to discourage you from trading options?

They want to have as much money under their management as possible.  Their goal is to manage every penny they can get their hands on because:
a) They might make a certain percentage of the assets managed, so every dollar in cash helps. 

b) They are often rewarded by their superiors for having larger assets under management.

c) They are afraid of letting money sit in cash for too long because, quite often, their customers see that there is money sitting in cash and consider it available capital.  The customer calls the investment professional when they want to pay off a debt, buy a new car, go to Las Vegas, or put that cash in a high-interest account that their banker just sold them on.  One way or another, the idea is that investment professionals are trained to not let cash sit on the sidelines for too long, or else the customer might pull it out of the account.

There are seminars that investment managers go to, or meetings that the top brokers have, where they share strategies to keep the customer from asking for the money back.  They are so paranoid that the customer will ask for the money back, that it’s one of the top things a broker will learn about as a sales technique. 

The funny thing is, the broker is right.  The customers are just humans.  Think about the fact that savings was at an all-time low while personal debt was at an all-time high, year after year for nearly a decade leading up to the recent crash.  Humans, especially Americans, have a very hard time sitting in cash. 

The problem is the broker is motivated to keep moving and moving (if it’s a commission-based broker) or to keep the money invested in a stock, whether it’s working or not, if it’s a fee-based investment adviser. 

That’s not good for you, the customer.

3.  It’s hard to hide commissions in options. 

Sometimes brokers trade stocks and are able to pick up extra commission on the trade desk by risking your capital.  It’s not easy to do these days, but it is still possible.  It’s pretty easy to do when it comes to trading bonds.  You’ll see one commission, and then there will often be a hidden commission.  Also, the brokerage firm often can get kickbacks one way or another when giving another “party lots” of order flow. 

With options, it’s an agency-based trade, and there are no hidden commissions.  The broker can’t hide them.  On top of that, the commission isn’t a lot of money to the broker or money manager because typically people trade smaller dollar amounts of options than they would trade in a stock or ETF. 

Last week, in my article titled “Read This, and Never Trade Stocks/ETFs Again!” I told you, if you think Apple (AAPL) will trade higher, you could either be a stock trader and buy 1,000 shares at $160 for $160,000 (all of which is at risk) or you could buy 10 call options (of a particular series) representing 1,000 shares and only commit $28,000.
If Apple traded 30 points higher:

Stock trader makes $30,000
Options trader makes $25,000

SIDE NOTE: (If the stock declines by $30, the option trader only loses $20,000).

But the maximum risk for the options trader is $28,000.  The stock trader loses $1,000 every time Apple loses 1 point of value and the stock was at $161!  So the maximum risk in the option was only 17.4% of the value of Apple’s stock ($28 is 17.4% of $161). 

It’s great to be able to sleep at night knowing you are only risking (worst-case scenario) a fraction of what you can lose in the stock.  But when it trades up 30 points, we only make $25,000 on the option. 

Something You Might Want to Teach Your Broker

Here’s the easy fix to that…

Remember, I told you the option had a delta of 0.75.  That means with a 1-point move in the stock, the option, theoretically, would move 75 cents. 

We want to make $1,000 for a 1-point move in Apple’s stock.  So, what do we do?  With 10 call option contracts (remember, there are 100 shares represented in a contract), we bought 750 deltas.  (Each call gives us 75 deltas.)

So let’s just buy something closer to 1,000 deltas.  How? 

My call option has 75 deltas.

Knowing that, I consider buying 13 call options to get me 975 deltas.  That means with a $1 gain in the stock, my option would likely gain 97.5 cents.

However, the delta of the option increases as the stock moves higher (with call options, but the reverse is true with puts).   So what does that mean?

Well, I still make 25 points because I still own the same option as before.  But since I own 13 call options instead of 10, I made $32,500 when the stock advanced by 30 points ($2,500 more than the stock trader).

What if the stock declined by 30 points?

The owner of the call option would lose 20 points of value (not 25) and since we own 13 call options that means a $26,800 loss compared to the stock owner who lost $30,000.

So, why are you trading stocks and ETFs again?

Options and Your Broker is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

In order to trade for a living or even trade profitably, you must have a good set of tools. One the tools that is essential is a good broker. With so many to choose from, there is no excuse for having a lousy broker.

As option sellers, we need to have an option friendly broker. This is a broker than either specializes in options, or considers option traders a very important customer base.

By using an option friendly broker you will get

• better commissions
• better margin requirements
• better prices on your orders
• better software/platforms to trade on
• better information
• and better education

How do you tell if your broker is an option friendly broker?

• If your broker advertises on national tv, it’s probably not an option friendly broker.
• If your broker is a household name ( they have their name on a stadium), they are probably not an option friendly broker.
• If your broker’s main sales pitch is how low their stock commissions are, they are probably not an option friendly broker.

So how do you find an option friendly broker?

• A broker with the word “option” in their name probably IS an option friendly broker.
• If your broker charges less than $2 for a single option or less than $30 for a dozen, they probably ARE an option friendly broker.
• If you can trade options from their own software, on the internet, or from your cell phone, you probably have an option friendly broker.
• If your broker puts on seminars and webinars teaching option strategies, you probably have an option friendly broker.
• If you can call their help desk and have them walk you through an iron condor trade, without them asking you what an iron condor is – you probably have an option friendly broker.

Finding a broker is not hard. Finding an good option broker is a little trickier. But if you ask option traders you will get many suggestions. Of if you join my site, I will show you which ones I think are the best.

Having a broker that is not option friendly, is like trading with one hand tied behind your back. Don’t do it.

Option Friendly Brokers is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

I just found out in my IRA account at Schwab, I can not trade any option spreads or Iron Condors on any Index.

My response:

It is not that you cannot trade these in your IRA. It is that Schwab will not let you. Big difference. I trade these in my IRA all day long and twice on Sundays. (joke).
 
If you are willing to switch brokers you can as well.

Big name brokers like Schwab like to protect themselves. They know that the general public is not sophisticated enough to be able to trade options much less sell options so in order to “protect” their customers they limit what types of trades you can do in your IRA account.

If it’s my money, I should be able to do whatever I want with it.

I used to have an IRA account at Fidelity. I had to “qualify” to be able to sell options in that account. There are different levels of options qualifications. They actually asked me several questions about my option trading experience before I could sell options in that IRA account.

Even then, I was severely limited in what types of trades I could do. Covered calls and credit spreads were OK, anything more complicated was not. Their order screen would not even take an option trade with more than 2 options.

So I switched my IRA (which is a Roth IRA in case anyone was interested), to an option friendly broker. No hassle, no questions, no fuss. My account was opened and I can do any trade I want. Even futures!

Selling options and complex trades are allowed in your retirement accounts. The bigger brokers do not allow it because they do not want to get sued if you blow up your account. But there are other brokers who do allow it.

I even know people with Real Estate in their IRA account.

Option Selling In Your IRA is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com