Make Money Even When the Market is a Turnip

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:

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.

So the market net credit for this iron condor is calculated as:

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:

The calculation of the midway between bid/ask net credit is calculated as:

The $0.45 midway net credit represents a potential return of 4.7%. The 4.7% potential return is calculated as shown below:

Since this iron condor has an equal spread differential 920-910=1135-1125 (short put strike – long put strike) = (long call strike - short callstrike) and the same month of expiration, September, the iron condorqualifies 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.

iron condor would have a return calculated as:

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.

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. The $0.40 net credit represents a potential return of 4.2%, slightly less than the midway between bid/ask return of 4.7%.

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:

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.

Tags: Iron Condor, Neutral