Backing Away

If you want to trade equity options then I would recomend the following:


1) Send your orders directly to the option exchanges (if you trade through IB - don't use BEST)

2) Be careful where you send them - not only may you not get filled but be prepared to wait a good two or three minutes to cancel your order. This can happen at the CBOE, PHLX, AMEX and even the PSE.

3) Be prepared for an option exchange to cancel trades. this can happen hours after the trade took place. Market makers don't cancel their bad trades, so expect to take a loss.

4) To avoid these kinds of problems - do your homework. know where you can/can't get an auto execution. The rules are different for each Exchange and different for equities at the same exchange. The only way to learn is through experience. So, if you trade, trade small.

5) Expect the auto execution rules to constantly change and as a result you must constantly stay on top of the current rule changes.

6) You will be surprised at some of the rules. So don't break any or the Exchanges will come after you. Currently, you can't enter two sided markets at the same time, there are market making rules (continuous and simulataneous orders are prohibited), you can't enter two trades on the same side of an equity class within a 15 second period, you can't send any computer generated orders etc...............


It isn't a friendly envoronment.


good luck
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Thx thx thx.

nitro
 
Thx for the tip.

Do you find that the most mispriced side of the spread is often the leat liquid side?

nitro
 
Originally posted by nitro
Thx for the tip.

Do you find that the most mispriced side of the spread is often the leat liquid side?

nitro
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No, develop your "own" valuation model, that is the hard part.
 
Being an IB retail trader with under $25K I have been trading options for the past 6 months or so and have experienced all the problems listed (except contract limits). But, I have found a way to use options to tell me which way the market in the underlying stock is really going to move with almost 100% accuracy on some lower volume issues by entering an order to buy an OTM Call at the asked price. If the order is filled immediately the stock always heads down, even if heading up at the moment. Also seems to work at the end of the day to tell which way the stock will open.
 
Originally posted by Sunfair
Being an IB retail trader with under $25K I have been trading options for the past 6 months or so and have experienced all the problems listed (except contract limits). But, I have found a way to use options to tell me which way the market in the underlying stock is really going to move with almost 100% accuracy on some lower volume issues by entering an order to buy an OTM Call at the asked price. If the order is filled immediately the stock always heads down, even if heading up at the moment. Also seems to work at the end of the day to tell which way the stock will open.
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Be careful, I don't think that is going to work out for you in the long run.

Your underlying assumption is that the MM in the option knows which way the underlying is headed; he may have a better sense than you but he does not control the stock.

A small order in a natural market "should" fill, regardless of which side you hit.

What is the size of your trade data set?
 
I just neter an order for 1 option. For whatever reason it always seems to work, at least with CCMP, PVN, and GMST. However, most of the time the order will just sit there with both bid and ask the same and may or may not fill before something moves. Like I said, it only works when order is filled immediatly so maybe the MM's or B/D's do know which way the stocks going or at least are very good at predicting.
 
With just CCMP, over 50 times in last two months, it worked 4 times last thursday. Due to daytrading rules I can't always short the stock, but it still helps with the more expensive NTM contracts.
 
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