AboutMark Hodge Expertise Questions related to technical analysis, strategies, risk, trading plans, trading psychology and money management. Experience in trading all markets and timeframes with expertise in futures (e-minis, currency futures, commodities, European Markets-DAX) and equity options. Unfortunately I am not allowed to offer any specific trading advice (i.e. should I go long the DAX today).
Experience I have been involved in the industry since 1995 working for Morgan Stanley Dean Witter and American Express Financial Advisors before becoming a full time trader. As Head Education Coach with Rockwell Trading I have coached hundreds of students around the world to achieve their trading goals with simple strategies, a sound trading plan and proper money management for the leveraged markets.
Organizations Currently serving as Rockwell Trading's Head Education Coach www.rockwelltrading.com and moderator for Rockwell's Day Trading Forum at www.rockwelltrading.com/forum
Education/Credentials Formerly licensed as a financial advisor with Series 6, 7, and 63 licenses. B.A. in Organizational Communications with a Business Minor from California State University, Sacramento.
Past/Present Clients I have worked with institutional traders, brokers, proprietary trading firms and private traders but respect their anonymity.
One of the few distinguished World Cup Advisors www.worldcupadvisors.com
Question I have two questions. First, different brokers have different margin requirements for selling options. With that in mind, since the broker controls the margin amount, can brokers sell options without margin?
Also, there is an option strategy called the Iron Condor spread where one buys and option while simultaniously selling another options. I was told that with this strategy, the risk is only the amount you use to buy one of the two options. My second question is, how could that be the only risk? What if the option that was sold is exercised? Since there is nothing to cover it, wouldn't that be a risk?
Answer Hello Frankie,
I apologize for the delay but was traveling. I'm not quite clear on your question about brokers selling options, but market makers and institutional traders typically have more lenient requirements. You might want to take a look at the CBOE website for more information:
www.cboe.com
As far as an Iron Condor goes, you basically initial two credit spreads. Example
Stock is at 50
Buy 60 call for $1.00
Sell 55 call for $3.00
Sell 45 put for $3.00
Buy 40 put for $1.00
If you look above, you will see that you will receive a $2 credit for the calls and a $2 credit for the puts, for a total credit of $4.00. You would be able to keep that ENTIRE credit if the price at expiration was anywhere between 45 and 55.
In this example the risk is going to be the difference between the strikes (60-55=5) minus the credit. So you would have a max profit of $4 and max risk of $1. Now these numbers are a little inflated but you get the idea.
If you are trading a Long Iron Condor, you would be BUYING the strikes inside nearest the stock price, and selling the OTM call and put, essentially putting on two debit spreads. IF the price closes OUTSIDE of of the strike you bought, plus the debit, you would be making money. Your profit would be capped by the the options you sold though, so the max risk would be the amount you are paying.
Example: If you are long a 55 Call and sold the 60 call, your upper breakeven would be the 55 strike PLUS the debit for the Long Iron Condor.
