If you’ve ever used the thinkorswim desktop platform, you may have noticed the little ‘Spread Hacker’ tab in the software. This isn’t a feature that gets talked about much, but it’s fun to play around with. While this may or may not be the original intent of the feature, it’s especially useful for generating slightly wacky ideas that you might not otherwise have considered. We wouldn’t advise just copying and executing any ideas generated there, but it’s a great way to get some creative trade constructions that you might not have thought of otherwise.

Note: just to be clear, we don’t endorse any one broker or group of brokers. Many people say that thinkorswim has the best retail options trading platform around, and we’re inclined to agree. But other brokers are very competitive in other areas, like commissions, execution, support, etc., and we haven’t taken a position on any of those questions. If you’ve never played with the thinkorswim desktop software before, you can get a free demo here.

Using the Spread Hacker

There are a lot of variables you can adjust in the software, and you can keep things simple or get as detailed as you want to. Which scan criteria are relevant depends a lot on what sort of spread you’re looking for. If you’re looking for interesting vertical spreads or iron condor candidates, the “front volatility”, “back volatility”, and “volatility differential” criteria obviously won’t be of much help, since verticals and iron condors use options expiring in the same month. But volatility skews and differentials can be plenty interesting when you’re focusing on calendar spreads and double diagonals, for instance.

In any case, here’s a simple way to generate some condors that might deserve further attention:

1. Set the Days to Expiration to 1-3 expiration cycles. Each expiration date is represented by a small vertical yellow line in the software. Note that quarterly expirations are included, which is why we include 3 cycles rather than 2.
2. If you only want to see market neutral trades, set the Delta to a middling range, like -0.10 minimum and 0.10 maximum. (Otherwise, leave Delta blank and you’ll find some even more unusual stuff!)
3. Look for a Probability of Profit between 50% - 80%. Anything less than 50% might not be very helpful unless you have an extremely firm thesis that the underlying is going absolutely nowhere, and conversely a probability of profit above 80% probably won’t compensate you with enough credit to justify the higher risk you’re taking on.
4. Leave the rest of the criteria blank, and search.

A Safe QQQQ Iron Condor

Leaving the settings as listed above, one of the first hits we saw this weekend was the following trade:

In case anyone has trouble with the image, that’s a QQQQ April 34/38/48/52 iron condor, with a $0.65 credit, a 73% probability of profit, a delta of -0.08, and QQQQ at $43.82. The negative delta exists because the thesis of this trade is that QQQQ won’t close too far above the resistance at 48 by April expiration, and this trade also gives plenty of room on the downside: QQQQ could break through its January lows, never look back, and this trade would still have plenty of room left. One downside is that 62 calendar days is a long time to wait for $0.65. Another downside is that the width of this spread is $4, so a 1-contract position would tie up $335 - 400 of capital, depending on your broker. Bringing the long strikes in so that the spread is only $2 wide on either side reduces the credit to about $0.47.

Conclusion

Maybe one of the most interesting functions of the Spread Hacker is the volatility analysis functions. For instance, you can exploit large differentials between front and back month volatility to find favorable diagonals and double diagonals. The software also allows you to search the entire universe of optionable underlyings, or to restrict your search to a particular industry, type of underlying (stock, ETF, index, etc.), or even to particular watchlists that you’ve created. Fun!