Adventures of Captain "One-Lot"

More from the Saturday ThinkorSwim seminar...

Captain One Lot is a not-so-nice nickname, for traders that do complicated option strategies on one lots (one option per leg). I am thinking it might come from the OEX pit days.

In the seminar, Don Kaufman outlines iron condors with his preferences, 2 dollars wide, 66% chance of success, 4 to 10 weeks out, five lot size (five options per leg). He goes on to add, that you probably can't make money doing one-lots because of commissions.

The commissions would be about $12 for a trade that best case grosses $65 and usually has to be taken off. So do the math, $65 - $12 - $12 = $41, equals not much profit, considering 33% of the time a person is likely to lose $135. Win $41 twice and lose $135 once, over and over again, and it is like selling rolls of nickels for $1.30 and making it up on the volume.

So what is Captain One-Lot to do? The initial reaction is to forget about the Iron Condors. The next thing to think about is increasing the size (which is a bad idea for most traders). Another idea is to widen the spread, and/or go out further in time. Look for the same 66% chance of success, increase the credit to the account so the commissions become more manageable.

Going to 5 dollars wide, perhaps 12 to 16 weeks out, with a credit of $170 per unit, and $12 commission increases the chances of actually making money. Yes, the dollar risk is greater, now up to $330 loss per unit. However, this is NOT the same as tripling up on size. At first glance it might appear that way, however, in the black swan scenarios of early exercise and assignment, a trader still only has one unit, one manageable SPY lot to deal with. The black swans are what one worries about.

Again, why iron condors? It is non-directional or delta neutral. Time decays works for you, you make the most money if the stock doesn't move at all. The risk is defined and limited. It is capital efficient, put up $330 to potentially make $170 on a high winning percentage trade. Compare that to what I often do, out of the money, naked puts. I might put up $620 to make $15 on a $60 stock, with more risk if the stock drops. A buy-write person might put up $5800 to make $150, with the entire $5800 at risk if the stock drops to zero. So the potential return on capital on the iron condor, with defined and limited risk, is a powerful lure to the professional trader and one reason it is such a popular strategy.