Very high premium on ITM iron condor

A

aleshinsky

Here's the setup:

The underlying XYZ is trading @50.00
There're options available at strikes 49, 50 and 51.
You can sell 50-49 put spread for 0.55 and 50-51 call spread for 0.50

By doing this you've just harvested 1.05 premium on 1.00 margin.

My question to all the option experts out there (no sacrcasm meant, I really have a great respect for a lot of members of this board), is how one can loose by taking a trade like this? Early assignment?
 
If you can do it then it's a risk free trade, assuming you are not missing anything.

However, my experience tells me that you are either missing some vital piece of information, which makes options look like they are mispriced or the prices you used are not achievable.

By the way, it's not an ITM iron condor. It's an ATM iron butterly.
 
Check Dividends on XYZ.

If there are no dividends, you'd end up with a risk free trade. Not likely, so chances are when you try to place the trade you don't get a fill for the 1.05 premium.

>>>>>>>>>>>>>>>>>>
Here's the setup:

The underlying XYZ is trading @50.00
There're options available at strikes 49, 50 and 51.
You can sell 50-49 put spread for 0.55 and 50-51 call spread for 0.50

By doing this you've just harvested 1.05 premium on 1.00 margin.

My question to all the option experts out there (no sacrcasm meant, I really have a great respect for a lot of members of this board), is how one can loose by taking a trade like this? Early assignment?
 
Quote from aleshinsky:

Here's the setup:


sell 50-49 put spread and 50-51 call spread

By doing this you've just harvested 1.05 premium on 1.00 margin.
More...

Looks more like a short Iron Butterfly to me.
 
Thanks for correction, it is an ATM butterfly of course.

My follow up question to Engine99: what is the mechanism by which upcoming dividends can hurt a holder of a short option?

And if there is such a mechanism, shouldn't it benefit holders of long options?
 
Quote from aleshinsky:

Thanks for correction, it is an ATM butterfly of course.

My follow up question to Engine99: what is the mechanism by which upcoming dividends can hurt a holder of a short option?

And if there is such a mechanism, shouldn't it benefit holders of long options?
More...

The dividends don't really matter in this case. Dividends are priced in.

It could be non-standard options or that the prices you used are not real in terms of actually getting a fill.
 
Well, I actually got the fill...
Two fills (one for each vertical) to be precise and yes, they've came withing 20 min from each other.
 
Quote from aleshinsky:

Here's the setup:

The underlying XYZ is trading @50.00
There're options available at strikes 49, 50 and 51.
You can sell 50-49 put spread for 0.55 and 50-51 call spread for 0.50

By doing this you've just harvested 1.05 premium on 1.00 margin.

My question to all the option experts out there (no sacrcasm meant, I really have a great respect for a lot of members of this board), is how one can loose by taking a trade like this? Early assignment?
More...

One issue I would see is that these must be at least May options, right? So at least one month or so to go - so in all likelyhood if this stock is volatile, it is priced in that it will be under $49 or over $51 by expiration (and maybe very soon) and therefore you won't be able to close this for a song. You might be able to squeeze the $.05 out of it, but who knows what the bid/asks will look like as it approaches expiration. What are the odds it will really be very near $50 a month from now? You might get $1.05 and have to pay $1.00 or $1.05 to get out.

If this stock is a real one and not just an example, it shouldn't be too hard for someone to figure out what stock it is - just search for optionable stocks near $50.

JJacksET4
 
Dividends have no bearing on the trade. You have a dollar of risk and a $1.05 credit. As MTE said, it's a risk free trade as long as the contracts are standard. If they're adjusted then you have a problem.
 
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