Anybody trading 100+ SPX options per order

D

DutchMan

Hi,

Anybody trading large size in the SPX? I’m thinking of trading SPX but not used to trade Open Outcry, I have only traded electronic option markets. I will trade via a Trading Desk with access to the SPX pit but I’m afraid the Market Makers won’t give me fair prices (if you compare it with electronic markets). If somebody could share some inside in the SPX option market I would really appreciate it. I only trade spreads (no outright positions).

Thanks in advance,
DutchMan
 
Your order will probably be filled fairly given what's going on in the pit at that moment. The problem is that you're far removed from that action (compared to the electronic), so you don't have direct contact.

The way around that of course is to put in limit orders. To me, the advantage of trading options with the pit is that you can negotiate with the guys in there, something you can't do on the electronic.

Orders I put into the pit are always delta and gamma-neutral spreads - usually 3-way spreads with two option legs, delta-neutral against the underlying. The MM's love those orders because they want to be flat too, so for them it's one-stop shopping with no execution risk.

So you can put in a bid, get an offer, then actually carry on a dialogue with the MM's through your desk, negotiating a price. There's actually some psychology here - during this process more and more MM's get interested, then get afraid of missing out, and you'll end up getting a better price.

So drag the process out over several minutes, give the guys a chance to drool a little, so that they're ready to jump when you go up the next tick. Each time you go up a tick, you'll draw more MM's in, who are now starting to worry they'll miss out and that the guy next to them will beat them to it (yell "sold" first) when you go up a tick more. Go up a tick, say, every minute or two. That will get the sharks circling.

My experience is in futures option pits, not the SPX. But I'm sure the psychology is the same.
 
To expand on the above: have you ever been to an auction where the auctioneer begins the bidding on an item at, say, $100 and there's absolutely no interest?

Often, the auctioneer will lower the opening to bid to, say, $10. Somebody will say sure, hell, I'll pay ten bucks for it. Then somebody bids 15.

By the time the bidding gets back up to $100 there's now a frenzy surrounding this item and it ends up going for $250.

That doesn't seem logical, but it's a consistent phenomenon and anyone who's been to auctions or used e-bay has seen it.

The same psychology exists in the pit. With a little time the perception of value changes and grows. Bidders start to become attached to the idea of owning this thing, and soon are willing to pay prices higher than they were. They start to become afraid of missing out, of getting beaten out by another bidder, and regretting it.

You can use that to your advantage.
 
Why don't you use a live broker? there are several very good firms that have people on the floor that will work these orders for you for a buck a contract.
 
Quote from TYtrader:

Why don't you use a live broker? there are several very good firms that have people on the floor that will work these orders for you for a buck a contract.
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Right. I don't know what the rules are at the CBOE, but at the CBOT I talk on the phone with a broker standing in the pit right next to the locals. It's almost like carrying on a direct conversation with them.
 
Quote from dmo:

Your order will probably be filled fairly given what's going on in the pit at that moment. The problem is that you're far removed from that action (compared to the electronic), so you don't have direct contact.

The way around that of course is to put in limit orders. To me, the advantage of trading options with the pit is that you can negotiate with the guys in there, something you can't do on the electronic.

Orders I put into the pit are always delta and gamma-neutral spreads - usually 3-way spreads with two option legs, delta-neutral against the underlying. The MM's love those orders because they want to be flat too, so for them it's one-stop shopping with no execution risk.

So you can put in a bid, get an offer, then actually carry on a dialogue with the MM's through your desk, negotiating a price. There's actually some psychology here - during this process more and more MM's get interested, then get afraid of missing out, and you'll end up getting a better price.

So drag the process out over several minutes, give the guys a chance to drool a little, so that they're ready to jump when you go up the next tick. Each time you go up a tick, you'll draw more MM's in, who are now starting to worry they'll miss out and that the guy next to them will beat them to it (yell "sold" first) when you go up a tick more. Go up a tick, say, every minute or two. That will get the sharks circling.

My experience is in futures option pits, not the SPX. But I'm sure the psychology is the same.
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Thanks for your inside, what’s your experience in fast markets. In some occasions you just want out. When trading electronic the spreads of course widen but you can change your order in a few seconds automatically hit by an electronic eye. What happens in the pit? Should you take bid / offer or try to save a nickel or dime? Do you have experience trading OEX options, is this still a nice market to trade?
 
Quote from DutchMan:

The only broker I know giving access is Interactive Brokers.

URL of IBs' Option Trading Desk
http://individuals.interactivebroke...highlights/PDF-OptionsDesk.php?ib_entity=inst
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It's not clear to me from this whether you have to go through their desk, or if you can talk directly with the broker in the pit. I would talk to them and find out exactly how it works. Maybe someone with CBOE floor experience could chime in here.

As for fast markets - that's a concern. On the futures side at least, brokers are not held during fast markets, so you take what you get. And even if you have access directly to the broker in the pit, you may not be able to get through during a fast market.
 
I am very familiar with trading SPX options, both small and very large orders. Brokers like IB and TOS will not let you talk to a broker in the pit, they will take your order and then call their broker who will get a market. The SPX is one of the few remaining monopolies and the market makers exploit it to no end. They will steal your money if you let them, and they will laugh at you afterwards (I used to be a market maker so I don't have a problem telling the truth about them). Virtually all of the people on this board have no idea what will happen in a real fast market, I can assure you that if one eventually does happen again you will get a fill so bad you will want to sue, but you would lose so don't bother.

The suggestion of making the order as delta neutral as possible is a very good one, then when you get a market of 1 bid at 2 you can leave your 1.75 bid in and wait to see if you can get filled. Remember that the SPX market makers are your enemy and they have a complete and total monopoly that they wield without any compassion.

If you are a large serious player you can get a broker to work your order as best he can but you have to pay extra, and the bottom line is the market makers are going to do whatever they want anyway.

For what it's worth, I switched from SPX options to ES options because I became so fed up with the SPX guys. ES options have become much better than they used to be - my gratitude to Atticus for pointing that out to me some time ago. ES options are .50 cents wide all day for at the money while the SPX is 2 dollars wide, which is better for you?

The only useful thing left about SPX options is you can sit and watch small retail orders languish out there while the market makers lean on them, and then pick them off before they do.

If I haven't talked you out of SPX options by now, I have some beautiful swamp land I would like to sell you.
 
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