This month I tried something that seemed like it would be a good idea at first. While talking with a fellow options trader the idea of trying to scalp some profits using an Iron Condor came up. What if you could sell a 5-point spread Iron Condor for more than $5.00. In theory you would be guaranteed to make some money. Now, remember theory and the real world are not the same thing.

If you were to put on a trade like this on a European style index then this would be a perfect trade – but you probably wouldn’t get filled. So I decided that before going big, I’d try a small lot (5 contract) position on the OEX, an American settled index.

Not the greatest idea… So here is the story. On Monday May 8th I sold 5 contracts of a 600/605 605/600 OEX Iron Condor for $5.10. The idea here is that after paying commissions I’d make a few bux with no risk. If you look at the chart for a trade like this, you are basically always going to make $50.00 profit. However, that is not the case if you get exercised before expiration. The reality is that the market makers are not idiots and they don’t just give us money – they have families to feed too! What is happening here is the market makers are will to give me my $50.00 so that they can exercise the short options when the market moves.

I knew ahead of time that this was likely the case, but I thought that the exercised would happen and my position would cover itself – what I didn’t know (I haven’t been exercised in the past) is that the exercise happens overnight and I can’t react until the market opens… That is not a good thing, and that is were the enormous value of a good broker comes into play.

After putting on the first trade, I realized that I was actually going to loose money on expiration Friday to exercise fees. So I figured it would be a great idea to simply up the contract sizes and cover the fees. So today I tried to sell an additional 40 contracts of my 600/605 605/600 Condor. Doing this would have opened me up to additional losses and problems. As a result of these orders hitting the system, I immediately got a phone call from the team at thinkorswim and we had a quick chat. They informed me of the overnight settlement risk, and we decided that it was best to cancel the orders and work to unwind any trades that had been filled.

I was able to successfully unwind my position from the 8th for a $5.20 debit (a loss) and the folks at thinkorswim were able to help me unwind the rest. The reality is that my broker possibly saved me from a large loss. There is no guarantee that I would have lost money here, but its possible – very possible. Using the numbers on the OEX as I write this, I would have been exercised the short 605 puts and been forced to over the 10 point spread between the OEX at 595 and my puts at 605, I could have tried to unwind and cover using the rest of my position – if the market didn’t move. If the market made a big movement I would have been out dollar for dollar the OEX movements.

Given that all of this was unwound before anything bad happened, I can only assume what the losses could have been, especially if I was filled out for the additional 40 contracts. With a full 45 contracts, I would be out $4,500 for each $1.00 difference in the OEX. If I had to cover a single day move of $5.00, that would have been a smooth $22,500 loss in one day. That would hurt a bit Instead, I was able to unwind for a total cost of about $130 dollars, including commissions. That didn’t hurt nearly as much! My normal condors from May will more than cover this loss, so the net effect is no big deal from a cash perspective, but a huge deal from a learning and broker value perspective!

So never underestimate the power of a good broker. I have been very happy with the folks at thinkorswim. They are fast, smart, they possibly just saved me over twenty grand and on top of that their software is amazing. I can’t say enough. If your thinking about trading options, or your currently trading options, take a look at thinkorswim… And don’t try to take money from the market makers on American style options – it might hurt!

After spending the weekend looking around for a couple of good candidate positions I was able to find a good one and get filled in the OEX

• April 2006 565/570 Bull Put Spread
• Sell 570 Put & Buy 565 Put
• Filled for $0.35

• April 620/625 Bear Call Spread
• Sell 620 Call & Buy 625 Call
• Filled for $0.20

• April 2006 565/570 620/625 OEX Iron Condor
• Total Credit of $0.55

• Margin requirement is $500 per contract
• Total credit is $55 per contract
• Return of 11% if all goes well

• Probability 80.17% chance that the OEX will close between 570 and 620

I’m pretty confident in the position. 20 points is big for the OEX, it will take a major move upward to challenge the Call side of this condor. I’m not so confident in the recent market rally, so this looks good. It is important to note that the April expiration cycle is a long one, so this money is on the table for 33 days! However, 11% in 33 days isn’t too bad!

I’ve also setup alerts in my trading software for the OEX, if something goes wrong my cell phone will start paging me like crazy! It’s nice to be able to place a trade and somewhat walk away for a few weeks