Dear Mr Wolfinger,

I have tried to sell high quality irons or boxes and have had two brokers tell me that I was executing "self financing" trades.  Is this normal, or is there somewhere I can go to put these trades on?  My vision is to someday get to Portfolio Margin, but I cant find a place to execute my box trades in quantity, to ever reach my goal.

Thanks,
Rob

Hi Rob,

1) Sadly you must forget boxes.  You want someone to take the other side of your trade.  No one will do that at any price that allows a profit for you.  Consider a $5 box, for example.  Let's say it expires in some future month and using current interest rates, the cost of carry through expiration is twenty cents.  That means you must get someone to pay more than $4.80 for that box.  When you add in commissions, you must collect even more than that.

OK.  Who can afford to buy it at that price?  No one.  Whoever does so, locks in a loss.  It's an impossible trade.  If you hear that boxes do trade, the reason is to eliminate pin risk at expiration.  Market makers buy and sell boxes with each other - near the closing bell on expiration day - to eliminate risky positions from their portfolios.  Not to earn a profit.

Thus, you can never buy or sell boxes at a decent price.  What you can do is try to leg into the box by doing a put spread or call spread first - hoping for a chance to do the other side quickly.  But please understand:  This is beyond foolish.  The best you can do is to lock in a few pennies when the trade goes your way, but you can lose many pennies waiting to get your price.  The risk/reward is way out of line.  Boxes are for floor traders only - and to be truthful, it's very difficult for them.

2) Iron condors are another matter.  Those spreads can be opened with plenty of opportunity to earn a good profit.  Of course, there is also the opportunity to incur a larger loss.  Thus, the secret to trading iron condors to be a good risk manager.  This is not a 'self financing' trade, so your broker is mistaken.  You do not want to be using full service brokers to execute option trades.  The cost is prohibitive.

One of my big peeves is that brokers simply do not understand options and why people trade them.  Add to that the fact that they charge too much for bad advice, moist traders are much better served with deep discount brokers.

Mark

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Mark D. Wolfinger

The Rookie's Guide to Options:The Beginner's Handbook of Trading Equity Options