Yesterday we closed a directional SPX Butterfly Spread for +29.7% excluding commission. But individual gains vary. Why?
In the previous post on Trade Execution and Trade fill prices, I mentioned about the fills used for P&L calculation. However, if you were to review your own performance, there is one thing that can make a big difference on the returns you get. And it is your brokerage commission.
Let’s start with a real example from one of the OPN member-
I entered this trade on Sept 17th, @ 1.85 & exited today for 2.35 . I had 6 contracts 1110 -1410=$300 profit less 74 $ commissions== $226= +19.7% gain.
Background: We entered into an SPX butterfly spread at $1.85 (member’s actual fill prices). We had a GTC order to close the butterfly at $2.70 credit. The mid prices went to as high as $2.90 but some members couldn’t get a fill on their GTC order. Then I sent a revised price of $2.40+/-. Finally, remaining members were able to close it for $2.35 to $2.45 credit. Thus generating double digit gains on this butterfly spread for 7-8 days holding.
Now let’s review the results of the same trade-
A Butterfly Spread has 4 option leg, thus opening and closing involves 8 contracts. In the above example, member scaled it to 6 butterfly and thus overall 48 contracts (for opening/closing).
- Assuming $1.54/contract on average, above member paid $74 in commissions.
- If someone was using IB’s published rates @$0.70, the cost will be $33.6. An additional gains of $40.4!!
- Using e-option ($3 min and $0.10/contract), the cost will be $10.8. An additional gains of $63.2!!
(This is not a recommendation to use any mentioned brokers. It is just an example to show benefits of the low cost. There are other things you should find out about your broker before you decide only on commissions e.g. order routing, safety of your assets, etc.)
Above example was for 6 Butterfly spreads only. Imagine if you were trading a million dollar portfolio on Butterfly spreads? Every single cent extra you pay, will result into thousands of dollars profit gone. Think about it for a minute !!
The more you pay in commissions, the more your trade needs to work.
That leads to the discussion on selecting a broker.
I published a post about who is the best options broker. It is a very comprehensive post that can help you in finding out who meets your need perfectly.
The commissions is a cost of doing “option trading” business. Just like any other business, if cost is out of proportion, pretty soon the business will run out of steam.
If you are selecting a broker because you like the User Interface (U/I) and all the NON TRADE EXECUTION related things, then recognize that factor in your P&L statement and don’t confuse the profitability with respect to commissions only. You are also paying for the U/I and for other frills.
If you are paying anything above $0.80/contract (no minimum) and should you still need frills like charts, option analytics etc, do write to me. I will try my best to help you find ways to reduce your brokerage commissions.
Many members dislike negotiating a trade price with market makers. Over the next few parts, I shall explain why should you care. I shall also provide you a framework to evaluate whether or not you should negotiate. Stay tuned.
Should you have any questions or would like me to cover anything in particular, either post your views in the comments section or do send me an e-mail -> A...@OptionPundit.com
Trade carefully, Trade profitably, OP