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

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

“Hi Allen,

Just going thro. this new RUT trade. The credit  on this trade (0.55) is far less than want u wrote(1.75). If this is not a typo from ur end, will it be still profitable to go for it at. 0.55.?

Thanks”

Here was my response:

NO.
 
It was not a typo. I placed this trade 50 days from expiration which is a lot of time, plus there are two sides, the calls and the puts. .55 might be acceptable if you were doing only one side – either call or put but not both.
 
You are not getting good prices.  Even if I do the trade right now, I still get 1.75, actually it’s 1.77. Perhaps you need to open an account with an option friendly broker.
 
again, you are getting killed on your prices. When you enter your orders enter a limit order and put the prices in the middle of the bid and ask.
 
So if  it is 1.00 .50  you would enter a price of .75
 
Does that make sense?
 
Allen

I do make mistakes and typos. But to go from 1.75 to .55 would be a colossal mistake. I have been thinking about writing a post called Option Friendly Brokers. Many of my members are using brokers that get them killed on pricing.

When entering a trade, either a stock or options trade, you never want to pay the Ask or the Bid. You want to place a limit order and choose a price that is as close to the middle in between the Ask and Bid as you can get. The more liquid the item you are trading, the better your chances of getting the mid price.

This does get complicated with complex option strategies like the iron condor which uses 4 different options at the same time. That’s where the option friendly broker comes in. My broker does not make me compute the mid prices. My broker just tells me what the mid price is and that gives me a target to get filled at.

If your broker is trying to get you to place trades at the Ask and Bid, your broker is costing you a lot of money. In technical terms this is called slippage: the amount away from the mid price. Slippage is way more dangerous to a trader than commissions. Many new traders choose a broker with the lowest commission rates. Wrong!

As you can see from the email, slippage is much more costly than commissions. It took a trade where I was getting 1.75 and dropped the credit to .55! Slippage could have cost this trader 1.20 per spread!  That’s $120 in dollar terms.

The easiest way to avoid slippage is to get an option friendly broker. The second way is to calculate the mid for all your trades and try to get as close to the mid price as you can.

Happy Trading!

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