A new options market is needed

B

botpro

Some thoughts of mine:

The current options markets are full of imbalance due to big spreads.
This is mostly caused by the market maker system.
Because of that, IMO the whole options market is 1) a big fraud (rip), and 2) doomed to collapse soon.

I just wonder: why did they not make it so that the price (ie. the premium) of an option
becomes a fix function of the price of the underlying?
Currently the price of an option is determined by bid and offer.
A better method would be IMO if the price would be determined by the exchange itself
based on historical volatility of the underlying, ie. just a math formula.
Then the spreads would be zero.
I think this would be a much better options market than what we currently have.

Or did I maybe overlook an important factor?
 
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Market makers use their capital to provide depth and liquidity. The more public order flow, the more paper on the book, the more MM that want to play, the narrower the spreads. High priced underlying for each percentage move, have a higher risk of getting picked off from delayed quotes or old market data. Because of that and multiple other reasons, the spreads will be wider on these symbols. If the exchange made markets for you, who would take on that risk for your benefit?
 
rmorse said:
Market makers use their capital to provide depth and liquidity. The more public order flow, the more paper on the book, the more MM that want to play, the narrower the spreads. High priced underlying for each percentage move, have a higher risk of getting picked off from delayed quotes or old market data. Because of that and multiple other reasons, the spreads will be wider on these symbols. If the exchange made markets for you, who would take on that risk for your benefit?
More...

Hmm. I don't understand what role, if any, delayed/old market data should play in this.
The risk would of course continue lying by the market participants themselves.
The benefit would be that spread would be eliminated, the main source for market fraud.
BTW, this is for options market only; the market of the underlying has to stay as is.
 
Since I was an Option MM, I can tell you that there are many risks in disseminating quotes. It is a for profit business with a lot of risk. Why would anyone eliminate spreads and why is that fraud? You are free to narrow any spread with your orders at anytime.
 
botpro said:
Some thoughts of mine:

The current options markets are full of imbalance due to big spreads.
This is mostly caused by the market maker system.
Because of that, IMO the whole options market is 1) a big fraud (rip), and 2) doomed to collapse soon.

I just wonder: why did they not make it so that the price (ie. the premium) of an option
becomes a fix function of the price of the underlying?
Currently the price of an option is determined by bid and offer.
A better method would be IMO if the price would be determined by the exchange itself
based on historical volatility of the underlying, ie. just a math formula.
Then the spreads would be zero.
I think this would be a much better options market than what we currently have.

Or did I maybe overlook an important factor?
More...

Since the bid ask, more often than not, seems to be so wide I switched over to synthetic's a while back. It helps to keep, at least one side, commissions and slippage in check. I have always had a bent to the long puts, and IMHO they are much easier to deal with than calls.;)
 
botpro said:
Some thoughts of mine:

The current options markets are full of imbalance due to big spreads.
This is mostly caused by the market maker system.
Because of that, IMO the whole options market is 1) a big fraud (rip), and 2) doomed to collapse soon.

I just wonder: why did they not make it so that the price (ie. the premium) of an option
becomes a fix function of the price of the underlying?
Currently the price of an option is determined by bid and offer.
A better method would be IMO if the price would be determined by the exchange itself
based on historical volatility of the underlying, ie. just a math formula.
Then the spreads would be zero.
I think this would be a much better options market than what we currently have.

Or did I maybe overlook an important factor?
More...

You ask these questions as you are trying to sell an options trading system for millions of dollars?
 
botpro said:
Some thoughts of mine:

... ...

Or did I maybe overlook an important factor?
More...

The most important factor, imo, is:

Apparently you know very well what you are talking about - here on ET!

Just like many of us!
 
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That wouldn't work. You have to take market makers as providing a important role. They provide liquidity and in turn take the risk.

I think I took it from an interview I heard from futurestrader71 when they asked about how some people feel about day traders. His response in short verse was that as a day trader , he provides liquidity and therefore gets paid to take the risk. If their was no date traders, a long term investors portfolio would be pretty hard to manage. Imagine trading penny stocks with no volume, the price is all over the place since theirs no liquidity/interest.

Options are even more complicated. It's a contract and when you want to buy, theirs a seller and he's taking the risk. Selling a naked call has unlimited risk while buying the call has a set risk and selling that call the seller should make a premium.

Maybe I'm just blabbing but if you really think about how the market works, it's so complex.

I'm not an option trader, it interest me. I watched an interesting documentary on YouTube about the Black Scholes model and from what I understood is that options have come a long way as far as pricing goes. Seems like in the real early days it was kind of all over the place.

Like in a sense why don't stocks have a set price based off their value. It's all supply and demand and what the market thinks is a fair price at any moment.
 
botpro said:
Some thoughts of mine:

The current options markets are full of imbalance due to big spreads.
This is mostly caused by the market maker system.
Because of that, IMO the whole options market is 1) a big fraud (rip), and 2) doomed to collapse soon.

I just wonder: why did they not make it so that the price (ie. the premium) of an option
becomes a fix function of the price of the underlying?
Currently the price of an option is determined by bid and offer.
A better method would be IMO if the price would be determined by the exchange itself
based on historical volatility of the underlying, ie. just a math formula.
Then the spreads would be zero.
I think this would be a much better options market than what we currently have.

Or did I maybe overlook an important factor?
More...
it's obvious you really don't know what you are talking about rofl
 
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