Q & A Legging Into A Spread

Hi Mark,

First I wanted to start by saying I thoroughly enjoy your blog.

I encountered something today and I wanted to get some
input from you. I was opening an iron condor in SPY (liquidity is always good) and sold the higher strike put first. I entered my buy (between the bid and ask) order for the lower strike put and
couldn't get filled. My bid just sat there, then the market moved away and I had to buy the
put part a lot higher than the initial order.

The same
thing happened on the call side.  With the market moving so fast this was an issue today. This cost a lot of the credit I was
looking to take in.

you suggest just taking the offer in a situation like this to get the
spread on?  Any insights would be greatly appreciated. 


Hello DA,

Thanks for the kind words.

It's unlucky that you 'legged' (trading one part of the position at a
time) into both spreads at the wrong time (judging by results). 

Before replying, let me comment:

  • It takes a lot of margin capability to sell naked index
    options.  Many small investors would be unable to do that, even if it's a low-priced ETF, such as SPY.
  • But I'm even more surprised you were able to 'leg' into the call
    spread by selling first.  Most brokers don't
    allow naked calls. 


1) If I were to attempt to leg into a trade, I'd want
to get the second leg filled as quickly as possible.  Why?  There's too little to gain
(a nickel or two) by bidding the mid point when the markets are tight (as they are in SPY) and too much to
lose (whatever you lost).  I might not pay the offer, but I'd be no
more than one tick away.   And if that did not fill quickly (2-3
seconds), I'd raise the bid and pay the offer. In volatile markets, bad
things can happen quickly – and nothing good could have happened,
except that you'd get a slightly better fill.  To me the risk/reward ratio is out of line.

2) I suggest not
legging into spreads.  Enter the two calls as
a spread.  Enter the two puts as a spread.  That's already taking market
risk because the market can move against you before you complete the
iron condor.

3) I usually enter the whole four legs of the IC as one order – to limit market risk.  I don't always do that and I'm not encouraging you to do so because that often gives you less than the best fill.  Selling individual spreads can work
better.  If your comfort zone allows you to leg into spreads, that
fine.  But please reconsider legging with individual options.

We all appreciate getting great fills – and in calm markets it's reasonable to try.  But not in volatile markets. 



2 Responses to Q & A Legging Into A Spread

  1. slait73 09/18/2008 at 8:21 AM #

    Hi Mark
    I discovered your blog 2 or 3 weeks ago and I got to tell you I´m learning a lot with it.
    It´s a pity the comments are so shorts (please be more extensive), and that there are no graphics to show better the explanations, so I invite you to do improve this excellent blog.
    Regards from Spain…..

  2. Mark 09/19/2008 at 11:56 AM #

    Hello Spain!
    Thanks for your suggestions.
    These blogs are not supposed to be tutorials. I cannot write with the same detail (and charts) that I do in my books.
    But, what I offer is opinion, advice, and commentary. I also provide detailed ideas for how you can adopt and profitably use specific strategies. Some readers take those tips and combine the advice with information they gathered elsewhere – and go off to trade – hopefully paper trading first.
    The Rookies Guide to Options will give you all you need to know to make a very good start in your options trading career. But this blog is intended for less in-depth discussions.
    I do appreaciate your interest in the blog.