Risk reward ratio in Options Spread orders !!!?

Question

Is it possible that when we p**a spread order we have negative loss and and positive profit? For example If i put an Long call condor strategy order like this :-

Buy a 4200 call 252

Sell a 4300 call @ 200

Sell a 4400 call @ 150

Buy 4500 call @ 90

Then as per the strategy the max loss I can make is the debit i paid. which in this case is actually is -8. That means a credit of 8.

and max profit is difference in strike price minus the debit. But in above case its a credit so diff + credit.

I am just wondering is it possible to have a negative risk in call spreads? Ignore brokerage for this.

Answer 1

If the trade is done with just a single order, then you will never get filled. The market makers (the one that actually get you filled on the trade) will never accept the order. It would just sit as a working ordering until it expires.

However, if you separate the trade into two vertical spreads it may work.

Buy a 4200 call @252

Sell a 4300 call @ 200

($52 debit)

Sell a 4400 call @ 150

Buy 4500 call @ 90

($60 credit)

By placing the two separate orders, price can move up and down during the day or over several days and if the get you filled. That way you will have a risk free trade.

Answer 2

In your example, if you put in a spread order to trade all four legs at once for a credit it would never get filled.

You could leg into the condor at those prices if you were lucky. For example, if you bought the two long positions and then waited for (1) the price of the underlying to go up and/or (2) the implied volatility to go up, you might then be able to lock in your profit by selling the short legs. Of course it you did that you would have unhedged risk between the time you bought the long legs and the time you sold the short legs, so it the market moved against you during that time you could end up with a large loss.

It is possible to establish a small risk-free profit if you ignore carrying costs. For example, you might be able to

(1) Buy 100 shares of a stock for $3,000,

(2) Sell one January 2010 $30 call for $300

(3) Buy one January 2010 $30 put for $250

The net debit for opening the conversion spread would be $2,950 and you would have a risk free profit of $50 since regardless of the stock price you could sell the stock for $3,000. However, that same $2,950 would have made more than $50 if it had earned the risk-free interest rate over the same time period.

Since a "negative risk" is a risk-free profit, you cannot open a spread that has a "negative risk" unless you ignore carrying costs (the cost of money for stock options), but you can lock in unrealized profits in an unhedged position by converting it into a spread.