Buying and Selling Options Details

Nater · Jun 27, 2012

How quickly, assuming the volume and open interest is reasonably high, would I most likely be able to buy or sell a contract? Like, would it be as quickly as if I were buying or selling the underlying stock? Or would I have an open order for days.

And if the option reaches expiration, and it is ITM, is it guaranteed to be sold at, at least, the intrinsic value?

Also, how close to the latest current bid price and ask price would you probably be able to buy or sell you option?

Traveler · Jun 27, 2012

If you are at market or a marketable limit order you'll get filled in milliseconds.

Going into expiration, there's no guarantee that the option will trade at it's intrinsic value, but if it doesn't then there's an arb opportunity for someone to buy the option and exercise it against a position in the underlying.

I would suggest you find the answer to these questions on your own before you start trading options.

cdcaveman · Jun 27, 2012

no matter what you will be able to get in and out of the trade... thats the function of every market maker in every series of options.. BUT the bid and ask spread might be huge due to the fact that the options aren't very liquid.. meaning they aren't traded often.. If a market maker (MM) can't make money in volume he has to widen the spread in less liquid options... if you stick to stocks in the major indicies, they usually are very liquid.. my suggestion is put limit orders in right between the bid and the ask and if you don't get filled after 30 sec. lower or raise the offer depending on weither you selling or buying..
the more frequent you trade.. the more important the actual exact cost you sell and pay for options come into play.. seems to me you have alot of reading to do..
start picking up books on options trading.. you should know alot more then you do before you start trading... my suggestions are..
Mcmillian on options
options market making by Allen Jan Baird
dynamic hedging .. by my favorite author (taleb)

any books on options volality
learn all the greeks , and the second order greeks as well
don't ever think you know enough...

stoic · Jun 27, 2012

Quote from cdcaveman:

....any books on options volality
learn all the greeks , and the second order greeks as well
don't ever think you know enough...

volality ???

Forget the Greeks!

cdcaveman · Jun 27, 2012

so.. how would you expect to hedge your risk if you don't know the Greeks.. or are you joking because greece is bankrupting the world?>

stoic · Jun 28, 2012

Quote from cdcaveman:

so.. how would you expect to hedge your risk if you don't know the Greeks.. or are you joking because greece is bankrupting the world?>

Not Joking. Don't need the Greeks to hedge.

After over 30 years I've yet to see the Greeks of any real use.

Yet to see anyone on ET prove otherwise.

newwurldmn · Jun 28, 2012

Quote from stoic:

Not Joking. Don't need the Greeks to hedge.

After over 30 years I've yet to see the Greeks of any real use.

Yet to see anyone on ET prove otherwise.

How do you hedge without knowing the sensitivities you are hedging?

stoic · Jun 28, 2012

Quote from newwurldmn:

How do you hedge without knowing the sensitivities you are hedging?

So how does knowing the ever changing "Theoretical" sensitivities help you hedge ??

The delta today is .65 yet the real delta is only .13 oh but thats because the IV was 18.43% but now its 12.86% or was it that the Gamma effected the delta....or was it that the Vega that changed...? then there's that Theta thing..... the underlying went down and so did the puts...! Oh it was that VIX...it was down...?!

When the option doesn't do what the model says it should do, it easy to point to (and factor in) all the other variables and justify the model.

What is the profit or loss point without the hedge. Based on the PRICE right now what is P&L with the hedge? How much profit potential does one give up with the hedge? How much downside protection does the hedge offer vs. cost? Is it worth it?

newwurldmn · Jun 28, 2012

Quote from stoic:

So how does knowing the ever changing "Theoretical" sensitivities help you hedge ??

The delta today is .65 yet the real delta is only .13 oh but thats because the IV was 18.43% but now its 12.86% or was it that the Gamma effected the delta....or was it that the Vega that changed...? then there's that Theta thing..... the underlying went down and so did the puts...! Oh it was that VIX...it was down...?!

When the option doesn't do what the model says it should do, it easy to point to (and factor in) all the other variables and justify the model.

What is the profit or loss point without the hedge. Based on the PRICE right now what is P&L with the hedge? How much profit potential does one give up with the hedge? How much downside protection does the hedge offer vs. cost? Is it worth it?

Because they offer you a language to answer the hedging question. If you just looked at price, you would gather nothing. But if you look "under the hood" then you can understand why there might be an issue.

Okay so the model delta is 65 right now because implied vol is 18. You think that implied vol is wrong and it should be cloesr to 12.8 and thus hedge to a lower delta. If you didnt know the greeks then you might as well hedge at some random number. Which would most likely "more wrong."

All your rhetorical questions may be valid but they don't offer a reason why understanding greeks aren't important. I don't hedge much but I do follow my greeks because they tell me the speed of my book in several dimensions.

TskTsk · Jun 28, 2012

Quote from stoic:

So how does knowing the ever changing "Theoretical" sensitivities help you hedge ??

The delta today is .65 yet the real delta is only .13 oh but thats because the IV was 18.43% but now its 12.86% or was it that the Gamma effected the delta....or was it that the Vega that changed...? then there's that Theta thing..... the underlying went down and so did the puts...! Oh it was that VIX...it was down...?!

When the option doesn't do what the model says it should do, it easy to point to (and factor in) all the other variables and justify the model.

What is the profit or loss point without the hedge. Based on the PRICE right now what is P&L with the hedge? How much profit potential does one give up with the hedge? How much downside protection does the hedge offer vs. cost? Is it worth it?

Charm, Vanna, Gamma measure Delta decay, delta to volatility and delta to underlying respectively. If IV went down you as you say, Vanna would explain the change in delta. if UL moved, gamma would explain it. If time went forward, delta decay would.

P&L greeks is measured as dC = (delta * dS) + (1/2 * gamma * dS * dS) + (vega * dsigma) - theta + epsilon.