My Millionaire Goal

Different people have different criteria when choosing a broker… For me, the key factor is commission… Ya, although they always say, you shouldn’t choose a broker based on commission, I find it hard to agree…

Commissions can easily take up a huge percentage of your profits, especially if you are doing options combination that involves multiple leg (such as an Iron Condor), you would want to watch your commission.

Else, even if you sold the options for a $1 profit and they all expire worthless, you’ll find that your profit may only be about 50 cents after commissions. If you did not take this into account when you calculate your odds in trading, a supposedly profitable trading system can easily end up being non-profitable.

So, which broker do I use?

Personally, I use thinkorswim… for a number of reasons

1) They have one of the most user-friendly platform with lots of tools to facilitate my trading.

2) They only require an opening minimum of $3500… a comfortable amount when I was starting out… I would definitely not want to risk $10, 000 when I was still a beginner…

3) They let you trade any options combination you like… This is unlike some brokers that may restrict you from selling naked CALLs (not that I do something so risky, but I just like the freedom)… Or sometimes, some brokers only allow new traders to buy options… which is total bu**shit in my opinion, an absolute loss-loss situation….

4) Their commission is not the lowest, but the beauty is, they actually offer to match the commission of most major web-based brokers (such as E*Trade, optionsXpress etc)… (Unfortunately, they do not match two of the lowest commission brokers out in the market: InteractiveBrokers and OptionsHouse*)…

Nonetheless, I am happy with the choice that I’m given at thinkorswim… So, in order to compare which commission rate I should use, I created a spreadsheet to compute the commissions for each broker based on the number of contracts I expect to trade… The winner so far is Schwab (for 15 contracts)…

Actually, Schwab is the best for me because I couldn’t qualify for thinkorswim EX/RATES #1, cos that requires me to have $25,000 in my account… I’m not there yet, but maybe, just maybe…. soon I’ll reach that amount…

*Btw, if you trade more than 12 contracts each time, and you are a US citizen, OptionsHouse offers the lowest commission (other than Interactive Brokers which has a absolutely complicated platform as they are more geared towards professional traders)… too bad I’m not a US citizen… maybe I should negotiate with thinkorswim for OptionsHouse’s rates…

Anyway, I’ve attached the Excel File that I use here…. Feel free to use it…

In my previous post, I talked about compounding money at a rate of 5% per month… This may not sound like a lot, but if you understand the power of compounding, you’ll appreciate that with 5% per month, your money will grow by about 79.5% in one year!!! I don’t know about you, but I’ll be pretty satisfied with such growth rate… imagine getting a 79.5% increment in your wage every year….

So, the million dollars question (no pun intended) here is: How to grow your money at 5% per month…

My answer? SELL IRON CONDORS….

What are Iron Condors?

An iron condor is a limited risk, non-directional option trading strategy that is designed to have a large probability of earning a small limited profit. It consists of a combination of a bull put spread and a bear call spread*. It is best used when one predicts that the underlying asset (e.g. a company’s stock) will not move beyond a certain price range.

For instance, let’s consider an actual iron condor position in GS (Goldman Sachs) that I had in the month of August.

Using options expiring on the same expiration month (August in this case), I created an iron condor by selling a lower strike OTM Put ($145), buying an even lower strike OTM Put ($140), selling a higher strike OTM Call ($175) and buying another even higher strike OTM Call ($180). This results in a net credit of $131 per lot (before commission).

Notice that an Iron Condor ONLY involves OTM options. Since I sold a OTM Put and a OTM Call, I have no risk of being assigned as long as GS trades within $145 to $175. That’s a pretty wide range for a stock to move within a month. In addition, the 50% and 61.8% Fibonanci levels of GS was at $149.14 and $173.35 respectively. So I was pretty confident when putting on this trade. Eventually, the trade went well and all the options expired worthless.

(How I view Iron Condors….)

Why do I love Iron Condors?

Limited Risk

Maximum loss for the iron condor spread is limited, although significantly higher than the maximum profit. It occurs when the stock price falls at or below the lower strike of the put purchased or rise above or equal to the higher strike of the call purchased. In either situation, maximum loss is equal to the difference in strike between the calls (or puts) minus the net credit received when entering the trade.

For instance, in the example above, if GS does not stay within the $145 to $175 range, I will start to lose money.

Case 1 (GS stock price is $178 on expiry date)

If GS goes above $175 and continues to rise to $178 on expiry date, I will lose ($178 – $175)*100 = $300 per lot (1 option lot = 100 shares). This is because the buyer who bought the $175 CALL option from me will now exercise his option and ‘demand’ that I sell the GS stock to him at $175. Since I do not own any GS stock, I’ll have to buy it from the market at the market price of $178, resulting in a loss of $300. However, since I received a premium of $131 when I sold my Iron Condor, my final loss is actually $300 – $131 = $169 per lot (still a very ugly loss).

Case 2 (GS stock price is $20000 on expiry date)
If GS starts a mad rally and suddenly shoots above $175 to $20000 on expiry date, my loss, fortunately, is not going to explode through the roof. Since I bought a $180 CALL to protect myself, I’m not gonna lose my pants… I do not need to buy the GS stock at the market rate of $20000. I can exercise my CALL and buy the stock at $180, resulting in a net loss of $500 – $131 = $369. Good luck to the seller who sold me the $180 CALL ;p.

But seriously, although my loss in this transaction is capped at $369, I’ll freak out if I really lose such an amount… (well, not really, but I really don’t consider it worthwhile losing $369 when I could have reduced the loss if I acted earlier)…

I am extremely risk-averse… which explains why I never busted my account… Therefore, I will never allow my Iron condor positions to go against me to such extent… I’ll probably close the position at breakeven or a small profit once the stock gets too close to my “defense lines”… I’ll talk more about my exit strategies next time…

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* If you are totally new to options, do check out my “Options Trading 101” guide. It’s largely incomplete at the moment, but I’m working on it…