Watch Out for the Alligator Spread

by Investing School on July 20, 2011

No, the alligator spread is not the name of some strange new dance or something you might put on your sandwich; it is an unprofitable spread that is the result of excessive commissions charged on a transaction. If you are unfortunate enough to fall prey to such a tactic, expect to see your profits eaten up by the commission you agreed to pay your agent.

Why call it an alligator spread? You have just seen your investment income eaten alive. Your next move should be to find a new broker – immediately.

Investing is a competitive market and that means that while ideally you will encounter traders who are honest and fair, it is up to you to read commission schedules carefully before you enter into any agreement. Your best bet to avoid such a situation is to work with brokers or financial advisors who don’t work on a commission basis.

It is only fair to point out that not all alligator spreads are the result of deliberate deception. There are times when the right combination of put and call options create the ideal conditions resulting in such a situation. How bad can it be? An investor can see 75-90% of their profits eaten up by the commission costs, making all their research and planning irrelevant. While this may provide a windfall for the broker, it is a real frustration for the investor.

Once again, everything comes down to diligence. Question everything, understand your position and watch those fees. There is no need to feed the alligator.

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