Complex Orders - Market Analysis

As many of you have realized by now my favorite trade structures with options are complex trades. Most of the trade ideas that I post in the G.O room are trades that have 2 or more legs in different combinations:

-Vertical spreads
-Iron Condors
-Calendar spreads
-Strangle swaps

There are many reasons why I prefer to deal with complex orders as opposed to just buying or selling a single option. However the most important one is price. By structuring a trade as a complex order we can greatly reduce the cost of trade, usually going from several dollars to just a few cents per contract. Also by using complex orders I seek to exploit other dynamics of option pricing, like trying to minimize the impact of IV changes in the total cost of the trade, or most of the time trying to exploit the rich skew present in index options. Beyond any particular reason I also use complex orders because I like the predictability of the outcomes, like knowing in advance the max loss and the max gain of a position.

That being said I have noticed that some of you (perhaps most of you) are a bit confused about the trade setups that I’m posting. My previous post about mid prices and providing liquidity all the time was a first step to clarify them a bit because I know it can be scary to see those incredible wide bid/ask spreads. However another point that I want to stress in this post is that the trade setups that I post are meant to be executed as a *single* trade, in other words all of the legs of the trade must be executed simultaneously both at entry and at closing time. The main reason for that is that the statistical and mathematical analysis used to design the trade relies on the assumption that the trade is “atomic” (indivisible), legging into the trade (executing individual legs) or out of the trade is not optimal for those setups. I know that some of you love doing that, but I would like to discourage you from doing it from now on. 

The reason is that anytime that the trade is broken into individual legs for execution you are incurring incredible risks (delta, vega and gamma risks) and a nicely profitable trade can turn into a loser really quickly.  One problem here is that most of our experiences suffer from confirmation bias, so we tend to remember only the trades where the individual execution worked to our advantage and we forget those where we lost money. One really important thing about this is that I want the trades posted to be profitable on their own and not being reliant on being lucky that the underlying didn’t move against us when legging out of it.

From all of the complex orders that I post, perhaps time spreads (calendar trades) might be suitable for individual execution (in the form of letting the short leg expire) but that is something that I rarely do and for instance last time we tried here we got burned (our ill fated bullish SPX calendar).

Another very important point that I want to drive in this post, is that *all* of the trades I post are treated as native orders by every exchange in the U.S, in other words no matter what broker you use, you should be able to submit the order for execution as a single trade without any issues. It is a matter of calling your broker or reading the instructions on how to submit complex orders for your software. Some platforms like ToS and IB TWS have special ways of constructing them, so it can be beneficial spending some time with your platform and getting familiar with opening and closing complex option orders.

For those of you that are really curious: In the US we have complex order books (very similar to the usual order books) that you can explore and browse in case that you are wondering what other people are doing in terms of complex trades. Every platform has ways of browsing the complex order book, also in  terms of execution, some brokers might internalize your order instead of sending them to the complex order book, but that really doesn’t matter as the important thing is that the order will be executed as a single trade.

Leo Valencia hosts the Gamma Optimizer options service at