I'll use IB's commiss. structure to illustrate. ($0.75/contract) When trading a credit spread, which underlying you choose is going to make a huge difference. The difference between strikes could be $20, $10, $5, $2.5, or $1. I rarely trade the issues that have $20 strikes, so we can eliminate them. The majority that I trade will be either $5, $2.5, or $1 strikes, and I'm pretty evenly spread between the three. So let's assume an average play at $2.5 strikes. It takes $1.50/contract to get into a credit spread. My average credit on those plays would be $115/contract. So 1.3% of my profits are going to be eaten up to get into the trade. This is regardless of the price of each leg or the underlying. The maximum commiss. I pay would be 2.6%, in the cases where a trade needed to be exited early. If you get rid of technical and fundamental analysis, or anything that might give me an edge in choosing the direction, then I have a 50/50 shot at being right. So 50% of the time the position will expire worthless and I will not have to pay any commiss. to get out. The other 50% of the time it will go against me and I will get out early for the max commission. So the "uphill battle" for credit spreads in my case is 1.95% (1.3% to get in, and 0.65% to get out). This is a much harder calculation if you are simply buying long directionally. Single leg = 1/2 as much commission, but you almost always have to make another trade to get out. So if you always bought options with the same profit target ($115/contract) as in the credit spread example, then your "uphill battle" would be 1.3% (0.65% to get in, and 0.65% to get out). So single leg plays have a 0.65% advantage over simple spread plays. IMHO this is made up for by a probability of profit comparison. You can't easily determine what % you would have to be right on long single leg plays, because you can be right and still lose money. That can't happen on an OTM/ATM credit spread. The questions that follow this relate to risk and leverage.
I'm with you so far, but we still have not factored in the cost of paying the bid-ask spread. This unavoidably comes out of our pocket when we exit our position(s). I have also noticed that many of these options are not particularly liquid, so that a LMT order can sit there all day and not get filled. CBOE web site has info on which underlying have widely traded options. There are 600 stocks which account for 95% of the options volume. They put up a spreadsheet monthly, the top ones are the usual suspects like GOOG and AAPL. Also FWIW on cheap options IB has commissions of 50 cents and 25 cents. There is one odd aspect to this, Direct Routed orders are 1.75 per contract, so it seems to me that if you want to save a few cents with price improvment at BOX, you end up getting socked with a larger commission. Someone said if you set up the order with non-nickel pricing and use SMART, SMART will send it to BOX, but when I try this TWS complains. I will have to keep trying. IB states "Interactive Brokers' customers submitting Smart marketable options orders will have their orders routed to BOX when BOX is at the NBBO, and Interactive Brokers has information that there is an NBBO improvement order on the opposite side of the trade, in which case your order will be exposed to a price improvement auction." If you are using IB, are you seeing this? BOX claims at their web site that half the orders benefit from price improvement.
Yes the b/a spread essentially does come out of our pockets but I'm not that concerned with it. It is easier to fight with a spread trade than it is with a single leg. In my experience, I get filled better and closer to the desired price in spread trades than with single leg trades. This is because I don't care what the price of each individual leg is, only what the difference between the two is. Usually I can get back out of a spread at the exact same price that I got in for. In these cases I am just fighting commiss. I can't really answer your IB questions because I don't use their platform. Too many customer service issues and a bad reputation. They do have the best commiss. structure, but from all the horror stories I've heard, I'll pay a few extra cents for good service.
1. Who do you use instead of IB? 2. I'm not sure I can imagine avoiding the bid-ask spread. Can you post an example trade? 3. Looks like we were wrong about AMD. It is up 4.43 in after hours trading to 37.80 on strong earnings. Coulda... shoulda... woulda...
1. I use TOS. Outstanding customer service. The platform gets better all the time. They know their stuff when it comes to options, and they will let you use the fee schedule from whatever broker you transfer from if you'd like. 2. I wouldn't say that I am avoiding the b/a spread completely. Not all the time anyway. For example: A DJX credit spread for $0.50 Because I have just said what spread I want, I don't care about each leg individually. Many times I'll avoid at least part (if not all) of the b/a spread because the short leg will be sold at the ask, or the long leg will be bought at the bid, or both. Just depends if someone wants to take the other direction on my trade. 3. Yeah...that why I also don't play earning very often. Guessing the direction on an earnings report is a crap shoot.