The expression “you can’t squeeze blood out of a turnip” refers to not being able to get something out of someone that they don’t have. Stock option trading can often feel like trying to squeeze blood from a turnip. However, with a little effort and some patience it is possible to squeeze blood from the stock option market.
For example, the PowerOptionsApplied Chromium TradeFolio TM was considering the following iron condor trade on 8/28/2009 for the SPX index:
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| . | Buy To Open Put | Sell To Open Put | Sell To Open Call | Buy To Open Call |
| . | SXBUB (SEP 910) |
SXBUD (SEP 920) |
SPTIE (SEP 1125) |
SPTIG (SEP 1135) |
| Bid/Ask | $1.30/1.60 | $1.60/1.90 | $0.55/0.65 | $0.30/0.60 |
The market prices of the options for this iron condor would be the ask price for the two long stock options and the bid price for the two short stock options.
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The net credit would be calculated as:
| market net credit = (short put bid – long put ask) + (short call bid – long call ask) |
So the market net credit for this iron condor is calculated as:
| market net credit = ($1.60 – $1.60) + ($0.55 – $0.60)
= $0.00 + (-$0.05) = -$0.05 |
The market net credit is a negative -$0.05 so entering the position with this net credit would guarantee a loss.
But what if it were possible to get better than market? What if it were possible to get prices midway between the bid/ask spread, for example?
The stock option prices calculated with the midway between bid/ask is shown in the table below:
| . | Buy To Open Put | Sell To Open Put | Sell To Open Call | Buy To Open Call |
| . | SXBUB (SEP 910) |
SXBUD (SEP 920) |
SPTIE (SEP 1125) |
SPTIG (SEP 1135) |
| Bid/Ask | $1.30/1.60 | $1.60/1.90 | $0.55/0.65 | $0.30/0.60 |
| Midway Bid/Ask | $1.45 | $1.75 | $0.60 | $0.45 |
The calculation of the midway between bid/ask net credit is calculated as:
| midway net credit = ($1.75 – $1.45) + ($0.60 – $0.45)
= $0.30 + $0.15 = $0.45 |
The $0.45 midway net credit represents a potential return of 4.7%. The 4.7% potential return is calculated as shown below:
| potential return = net credit/(margin requirement – net credit)
= $0.45/(10-$0.45) = 4.7% |
Since this iron condor has an equal spread differential 920-910=1135-1125 (short put strike – long put strike) = (long call strike – short call strike) and the same month of expiration, September, the iron condor qualifies for special margin. This means the iron condor only requires half the margin of a standard iron condor. Not all brokers support special margin for iron condors, so traders wanting special margin consideration should verify their broker of choice supports special margin.
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A standard iron condor would have a return calculated as:
| = $0.45/(20-$0.45)
= 2.3% |
The special case iron condor has a potential return that is twice the return of the standard iron condor. Trading iron condors with special margin consideration is well worth it.
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The iron condor trade was entered with a net credit of $0.40 which was a little less than the midway net credit of $0.45. This was done in order for all of PowerOptionsApplied‘s many customers to receive execution for their positions. The $0.40 net credit represents a potential return of 4.2%, slightly less than the midway between bid/ask return of 4.7%.
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The trade took a few minutes to execute and this is where a little patience was required. A few minutes of waiting is not too bad, sometimes a trade can take several hours to execute and sometimes it doesn’t execute at all. If the trade had not executed by about 2p.m., the net credit for the trade would have been decreased slightly. Decreasing the net credit slightly, often enables a trade to execute. The trade executed with the following fill prices:
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| . | Buy To Open Put | Sell To Open Put | Sell To Open Call | Buy To Open Call |
| . | SXBUB (SEP 910) |
SXBUD (SEP 920) |
SPTIE (SEP 1125) |
SPTIG (SEP 1135) |
| Bid/Ask | $1.30/1.60 | $1.60/1.90 | $0.55/0.65 | $0.30/0.60 |
| Fill Price | $1.50 | $1.80 | $0.55 | $0.45 |
The actual fill prices were very close to the midway between bid/ask prices shown earlier.
For option investors with a lot of time and patience, the net credit can be squeezed even more. For this case, the initial net credit could have been entered at $0.50, for example, and then gradually decreased until the trade executed.
To calculate the maximum net credit possible, just reverse the bid/ask for the market net credit as shown earlier:
| maximum net credit = (short put ask – long put bid) + (short call ask – long call bid) = ($1.90 – $1.30) + ($0.65 – $0.30) = $0.60 + $0.35 = $0.95 |
It would have been a waste of time to enter a trade for greater than the maximum net credit of $0.95 as it would not have executed.
Stock options traders with a LOT of time on their hands could even enter the stock options trade at $0.95 and gradually decrease the net credit until the position executes.
But experience has shown that option trades will often fill at prices near the midway point between the bid/ask prices.
It really is possible to squeeze money out of the stock options market, all that is needed is a little effort and a little patience. PowerOptionsApplied was able to take a position that was a loss at market prices and turn it into a potentially lucrative position using midway between bid/ask prices.
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.
PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.
PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.
[tags] option market, SPX, index, Bid/Ask, net credit, market net credit, maximum net credit [/tags]