Index Spreads

Creating Index Spreads - Cash Versus Futures markets

When evaluating spreads, especially those with more than 2 legs to the strategy, what you may see as a great trade isnt always what you get. In the futures market, you have a better chance of being able to make a profit on a trade such as a butterfly or condor. Commissions on future options are usually less than half those of stock options and when you look at the leverage factor the differences are really seen. Lets take a look at 2 scenarios:

S&P Futures Condor

Buy 1 SP 955 Put - 13.50
Sell 1 SP 960 Put - 17.25
Sell 1 SP 970 Call - 17.25
Buy 1 SP 975 Put - 12.50

Credit of 8.50
Risk - 1.50
Reward - 8.50

Lets add in slippage of 1.00 to this spread

Now your risk is 2.50 and your reward is 7.50. Still a good risk / reward trade.

Your commissions on this trade are now $30 per round turn per contract. $30 x 4 = $120 in commissions or another .25 cents in commissions added to the spread. Now the trade risk reward after commissions looks like this:

Risk after commissions - 2.75
Reward after commissions - 7.25

Still looks pretty good for a strategy in a non moving market.

NOW - lets look at it again using S&P Cash Market.

S&P Cash Condor

Buy 1 SP 955 Put - 13.1/2
Sell 1 SP 960 Put - 17.1/4
Sell 1 SP 970 Call - 17.1/4
Buy 1 SP 975 Put - 12.1/2

Credit of 8.50
Risk - 1.50
Reward - 8.50

Adding the same slippage as the futures trade, our risk becomes 2.50 and our reward becomes 7.50. Commissions, however, are a bit different. An average discount broker will charge about $45 for each options transaction, both to enter and exit the trade. Lets add them up and see what commission would cost for this trade.

$45 x 8 (4 to enter and 4 to exit) = $360

This would represent about .75 in commissions for the cash trade. The new risk / reward looks like this:

Credit after commissions - 6.75
Risk after commissions - 3.25
Reward after commissions - 6.75

Using the futures markets can yield 10% more in after commission profits to this trade and can cut the risk after commissions by 16%. Obviously it can be done in both markets, but you need to take in account the slippage and commissions and weight them in your decision. Taking the time to view all risk and reward positions can help maximize your profit potential and keep the income flowing.

Good trading!

physical health of trader

Physical Preparation
It has been said, "markets are a cruel lover and more emotions can be experienced in a month’s worth of trading than many will experience in five year’s of normal living". As a trader, I would not dispute this statement. However, I do feel there are a number of steps you can and should take to help defuse some of the discomfort long before they become actual problems.

The first potential problem is your own physical health. After you reach early to mid-thirties, it becomes increasingly important for you to maintain your physical condition. If you feel sluggish, you will be amazed at how good you will feel by engaging in a brief period of aerobic exercise 3 to 4 times a week. All you need is 15 minutes a day where you can raise your heart rate to 80% of its maximum capacity.

You may feel your computer screen is better than mom’s apple pie. However, it is also replacing the "t" in "Stud" with a "p" as you may be turning into a computer potato. If you are using OPTIONETIC’s strategies, there is really no need to watch the computer screen all day long. Our strategies are designed to be low risk/low stress, freeing you to engage in other activities during the day.

Finally, how often do you watch ___________________ (fill in the blank with the six o’clock news, the ten o’clock news, the Today show, a football game, the Jay Leno show, Financial News Network, etc.)? If you watch your local or national news on a daily basis, you could be cycling on a stationary bike for those 30 minutes. If you do this daily, you will end up feeling much better about yourself than any news or talk show will ever make you feel. If you commit to such an exercise program, you will quickly find out you are getting much more out of your TV programs and have a "refreshed" feeling. If you are over 30, please consult with your doctor before beginning an exercise program. Being in good physical shape prepares you both physically and mentally for a successful trading career.