Member R. writes in with a question that gets asked quite a lot:

I noticed that your two current trades have a credit of around .60 to .70. Doesn’t a trade for this amount of credit generate a lot of commission expense?

What do you do about commissions? Is that just part of the cost to do the trade?

So yes, on the face of things, it does look like iron condors impose higher commission costs. But that’s kind of an illusion - in the sense that if you sell a call vertical today to fade a rally or something, and then you turn around and sell a put vertical tomorrow or the next day to fade weakness, you’ll end up with an iron condor and you’ll have paid just as much in commission costs (assuming fixed, per-contract costs; if you pay any kind of ticket charge, then obviously entering the trade all at once costs less). But the funny thing is, you don’t typically hear people complaining about the incredible commission burden of vertical spreads or calendar spreads, lol.

R.’s question is totally appropriate, and it’s actually kind of commendable to keep an eye on transaction costs: many retail mutual fund investors, for example, are notoriously bad about paying attention to fees and costs.

At the same time, some people get so exercised about transaction costs that they spin themselves into inaction. I mean, if your primary goal is to pay as little in commissions as humanly possible, there’s an awesome strategy out there that will allow you to pay ZERO commissions for all eternity. True, it often lags the market averages, but it is beating the markets so far this year. The only downside is that it always gets beat by inflation. We’re thinking of offering a newsletter based around this strategy, if anyone is interested. The newsletter will be called “Cash”.

• 1 - The Advantages of Closing a Few Doors - New York Times
  “Closing a door on an option is experienced as a loss, and people are willing to pay a price to avoid the emotion of loss,” Dr. Ariely says. In the experiment, the price was easy to measure in lost cash. In life, the costs are less obvious — wasted
  (tags: decision economics behavioral)

You know who’s going to win American Idol? This David kid (pictured): every female who comes within earshot of him goes absolutely nuts.

You know who’s not going to win American Idol, or anything else for that matter? Citigroup. The Striking Price Daily has the goods:

“The three largest problems for Citigroup are further write downs to their carrying values of [collateralized debt obligations] related to subprime mortgages, further write downs from leverage lending commitments, and further write downs associated with on balance sheet consumer loans,” Whitney wrote in a Monday research note.

With such a dour assessment it’s hard to believe that Citigroup could suffer from any other ailments. But the big bank can, and does. The bank disclosed late Friday in its 2007 annual report that its traders lost $100 million on 15 separate trades in 2007. That’s $1.5 billion, which is a lot of shekels to lose.

Schwartz recommends that investors who want to position for further declines in Citigroup’s stock consider buying a “put spread.” This strategy involves buying the January 22.50 put, and selling the January 20 put. If the stock declines to $20 before the options expire in January, investors stand to make a triple-digit return on their money. [link]

You know, we love Barron’s, and they’re one of the only (maybe the only) mainstream financial publication that has any decent, consistent options coverage. But how long do we have to live until “put spread” isn’t a scary-weird-newfangled phrase that needs its own scare quotes so that crusty mutual fund shareholders don’t feel left out?

Anyway, this is kind of an obvious trade, but not necessarily a bad one. There’s the risk that XLF is bottoming here (C makes up 5.8%), and you’ve obviously got no upside protection, but those trading losses at their prop desk make you wonder whether Citi is still making money at anything other than ATM fees.

As you might expect, the rally of the past two days has pushed the VIX down quite a bit. As the VIX daily chart shows, the index is today pushing against the lower edge of its Bollinger band, and just a hair off its 200 DMA.

The Thesis

The thesis here is just that the VIX is mean-reverting, and that since June of last year it hasn’t flirted with its 200 DMA for long without bouncing right back up. If this is the start of a big and sustained multi-month bullish run, that tendency might not hold true, but given the economic climate we don’t see any reason to expect that to happen.

The Trade

1) You could buy some VIX March 25 calls for $1.05, or
2) take the long-theta route by selling the VIX March 22.5/20 put spread for $0.80.

Disclaimer: We disclaim!

If you’re wondering what the Woody Guthrie pic has to do with anything, well, it doesn’t. But we like to think that Woody, rebel that we was, would be strategically long volatility.

FT Press sent us a few copies of The Volatility Edge in Options Trading, and we’ll ship a free copy to anyone who refers a friend over the next two weeks.

Once your friend has signed up, just send us their name along with your info, and we’ll send the book out to you, pronto.

P.S. It’s a very attractive hardback, and makes a great addition to your trading library.