Occasionally I write articles answering students’ questions on various topics regarding options trading, and I will do so this week. First I will address a student’s concerns regarding commissions when it comes to credit spreads. Then I will address a question about watch lists and how many lists options traders really need to be successful.
PART ONE
The first question concerns the issue of credit spreads. Basically the student’s biggest concern was the fact that selling a short vertical spread on an ETF brings in so little premium and that out of the credit premium, the commission needs to be paid before one could state that the trade was worthwhile doing.
My comment to that observation is – yes. The observation is accurate and correct. A trader ought to count in the cost of commissions; it is simply a part of the “game.” However, for those who have been around for awhile the cost of commission today is laughable in comparison to what it used to be. When I was starting I actually had to figure the cost commissions into my Profit and Loss prior to the entry. Back then there was a ticket charge plus the commission per contract. Not that the remnant of that legacy is completely dead today, for instance some brokerages are still charging, on average, a ticket cost of 9.99 plus 0.75 per contract. Hence, if a trader is considering a trade only with single units, then the calculation would be the following:
The cost of long call premium plus (9.99 + 0.75) $10.74 to get in and also $10.74 to get out; hence to be profitable the long call must make (2×10.74) $21.48 just to break even. Knowing this prior to the entry, a trader really has to be quite convinced that his long directional call is going to increase in premium within the time… Continue Reading
