Calendar spreads

[stocktrader]

"The other way I use is to time the delta movements with the mm's autoquote features"

I was kinda hoping someone else might ask about this, but maybe everyone else knows what you are talking about. What are the mm's autoquote features. If the answer is long do you have a link to a web site somewhere that explains it in detail.

 

[Maverick74]

Quote from stocktrader:

"The other way I use is to time the delta movements with the mm's autoquote features"

I was kinda hoping someone else might ask about this, but maybe everyone else knows what you are talking about. What are the mm's autoquote features. If the answer is long do you have a link to a web site somewhere that explains it in detail.

OK, basically what autoquotes are is mm's input the vol skew on their options that they are making markets in and as the stocks move the quotes automatically update. So the quotes you see on your trading screen are not actually quotes mm's are screaming out in the crowd but rather they are electronically updated.

Basically if you know the delta of the option, you know when the quotes are going to "tick". I'll give you an example. Say you have a $50 stock and your trying to buy the dec 55 call which might have a delta of say .30 This means that for every point the stock goes up the call should go up .30 or you could say for every .15 the stock goes up, the call will tick up a nickel. If you know where the pricing points are where this tick occurs you can then box in the range where the quotes update. So say at $50, the dec 55 call is at .75 by .80. Well you know that at 50.15 the dec 55 calls will update to 80. by .85 and at 49.85 the dec 55 calls will be 70. by .75. So what I do is use that info to leg into the calls before they update.

So if I'm looking to buy the calls and the stock is at 50 even and now its at 50.10 with a bid, as soon as it goes .12 bid I will lift the dec 55 calls for .80. Then as the stock rallies up to .15 the mm's are now .80 bid where I bought the calls! Sometimes I can also pick off the puts at the same time if a customer order is on the books and the mm's back away from the customer order and let me hit it.

I leg into all my options this way. It requires a lot of concentration and you can't take size doing this because anything over a certain size will get bypassed directly to the mm where he can reject the trade because the market has moved away from him. But you can always get 10 lots off and just keep legging in. You would be amazed at how much money you save by doing this. I can almost always buy all my options on the bids and sell of the offers. But it is a skill that you must develope.

If you have any more questions feel free to ask the mavmeister.

 

[stocktrader]

Mav,
thanks once again for being so helpful and for providing a very detailed answer to my question. Its great to have people like you willing to share their hard won knowledge on these message boards for anyone with an interest in options to read.

I am going to do some more studying and this will probably mean I will come back to you with a few more questions (or maybe more than a few lol).

 

[ChrisM]

Quote from Maverick74:



OK, basically what autoquotes are is mm's input the vol skew on their options that they are making markets in and as the stocks move the quotes automatically update. So the quotes you see on your trading screen are not actually quotes mm's are screaming out in the crowd but rather they are electronically updated.

Basically if you know the delta of the option, you know when the quotes are going to "tick". I'll give you an example. Say you have a $50 stock and your trying to buy the dec 55 call which might have a delta of say .30 This means that for every point the stock goes up the call should go up .30 or you could say for every .15 the stock goes up, the call will tick up a nickel. If you know where the pricing points are where this tick occurs you can then box in the range where the quotes update. So say at $50, the dec 55 call is at .75 by .80. Well you know that at 50.15 the dec 55 calls will update to 80. by .85 and at 49.85 the dec 55 calls will be 70. by .75. So what I do is use that info to leg into the calls before they update.

So if I'm looking to buy the calls and the stock is at 50 even and now its at 50.10 with a bid, as soon as it goes .12 bid I will lift the dec 55 calls for .80. Then as the stock rallies up to .15 the mm's are now .80 bid where I bought the calls! Sometimes I can also pick off the puts at the same time if a customer order is on the books and the mm's back away from the customer order and let me hit it.

I leg into all my options this way. It requires a lot of concentration and you can't take size doing this because anything over a certain size will get bypassed directly to the mm where he can reject the trade because the market has moved away from him. But you can always get 10 lots off and just keep legging in. You would be amazed at how much money you save by doing this. I can almost always buy all my options on the bids and sell of the offers. But it is a skill that you must develope.

If you have any more questions feel free to ask the mavmeister.

Mav,

first, I prefer Mavmaster than Mavmeister

referring to your technique - what do you do if the market moves while you are establishing spread position and one leg of the spread starts to run away ?
Also, if you don`t mind sharing, how often it happens ?

Regards

 

[Maverick74]

Quote from ChrisM:



Mav,

first, I prefer Mavmaster than Mavmeister

referring to your technique - what do you do if the market moves while you are establishing spread position and one leg of the spread starts to run away ?
Also, if you don`t mind sharing, how often it happens ?

Regards

Ok, well lets look at this two ways. One is in a trending market and the other a choppy market. In a choppy market you can leg into these spreads nicely without a problem waiting for the market to gyrate back and forth .15 to .30. In a trending market I would basically leg into the call at lets say .80 when the stock is at 50.12 and the put might be .55 by .60. So now the stock crosses the .15 area and the calls go to .80 to .85 and the puts go to .50 by .55. I would buy the puts at .55 very easily. Now if the stock goes back down through the .15 and the puts go back to .55 bid that's fine, I still picked the calls off for a nickel and I know that I can buy the puts anytime as long as the stock holds the 50 dollar to 5.15 level assuming of course the puts have a 30 delta as well. I'm also using a straddle for this example. So I can hold out and wait for the stock to tick through .15 and grab the puts at .55.

If the stock starts to get weak and starts getting near that figure. I'll probably just go ahead and grab them at .60. Then if the stock breaks through that figure depending on the situation I might pick off some calls at .75 only to see them go .80 bid as the stock goes back up through the figure again. See, I can do this all day. The stock could be all over the place or it could be trending up or down 3 pts and I can just keep buying and legging into the calls and the puts all day long building a nice position.

What do I do when they go against me? It doesn't happen. You have to be very disciplined. Don't get cute. You know what your range is to play with, in this example it's .15 so when the stock looks like it's going to move into a new range, then you have to grab the options before they tick. This is a very good and conservative way to leg into these option at great prices. You are not trying to sell calls on 2 pt rallies then wait for the stock to come in a full pt to buy other calls and so forth. That is not legging in, that is speculating. And if your good at that you are much better off just trading the underlying. Makes sense right?

 

[TempusFugit]

Quote from Maverick74:



Ok, well lets look at this two ways. One is in a trending market and the other a choppy market. In a choppy market you can leg into these spreads nicely without a problem waiting for the market to gyrate back and forth .15 to .30. In a trending market I would basically leg into the call at lets say .80 when the stock is at 50.12 and the put might be .55 by .60. So now the stock crosses the .15 area and the calls go to .80 to .85 and the puts go to .50 by .55. I would buy the puts at .55 very easily. Now if the stock goes back down through the .15 and the puts go back to .55 bid that's fine, I still picked the calls off for a nickel and I know that I can buy the puts anytime as long as the stock holds the 50 dollar to 5.15 level assuming of course the puts have a 30 delta as well. I'm also using a straddle for this example. So I can hold out and wait for the stock to tick through .15 and grab the puts at .55.

If the stock starts to get weak and starts getting near that figure. I'll probably just go ahead and grab them at .60. Then if the stock breaks through that figure depending on the situation I might pick off some calls at .75 only to see them go .80 bid as the stock goes back up through the figure again. See, I can do this all day. The stock could be all over the place or it could be trending up or down 3 pts and I can just keep buying and legging into the calls and the puts all day long building a nice position.

What do I do when they go against me? It doesn't happen. You have to be very disciplined. Don't get cute. You know what your range is to play with, in this example it's .15 so when the stock looks like it's going to move into a new range, then you have to grab the options before they tick. This is a very good and conservative way to leg into these option at great prices. You are not trying to sell calls on 2 pt rallies then wait for the stock to come in a full pt to buy other calls and so forth. That is not legging in, that is speculating. And if your good at that you are much better off just trading the underlying. Makes sense right?

I've used a similar legging-in strategy with some success on options (e.g., SPX) where the bid/ask spread can be several multiples of the minimum options tick. E.g., currently the ATM call is quoted 10.50 by 11.60, with a minimum tick of .10. If I'm looking to sell to open (legging into a short straddle) then I enter a limit STO order for 11.50. This should put me first in line in the book and as the underlying moves up I should get filled with no more than a .2% fluctuation (assuming a .5 delta and SPX=1066). Similarly on the put side. My objective is to not pay the bid/ask spread and I don't try for more than that because that indeed would be speculation.

Question to those who know how MMs work: do they even notice when relatively small orders like this (say, a 10 lot) come across? And if so, do they care?

 

[Maverick74]

Quote from TempusFugit:



I've used a similar legging-in strategy with some success on options (e.g., SPX) where the bid/ask spread can be several multiples of the minimum options tick. E.g., currently the ATM call is quoted 10.50 by 11.60, with a minimum tick of .10. If I'm looking to sell to open (legging into a short straddle) then I enter a limit STO order for 11.50. This should put me first in line in the book and as the underlying moves up I should get filled with no more than a .2% fluctuation (assuming a .5 delta and SPX=1066). Similarly on the put side. My objective is to not pay the bid/ask spread and I don't try for more than that because that indeed would be speculation.

Question to those who know how MMs work: do they even notice when relatively small orders like this (say, a 10 lot) come across? And if so, do they care?

To answer your question, no. If you trade 10 lots or less basically what they do is those orders get broken up and dispersed among all the mm's in the pit. Say you route the order to the cboe and there are 10 locals in that pit. Your 10 lot would get routed automatically to the 10 locals. Each local would get one contract each. He can choose to reject the trade if he wants but they never do for that size. It's only costing him 5 dollars.

 

[ChrisM]

Quote from Maverick74:



Ok, well lets look at this two ways. One is in a trending market and the other a choppy market. In a choppy market you can leg into these spreads nicely without a problem waiting for the market to gyrate back and forth .15 to .30. In a trending market I would basically leg into the call at lets say .80 when the stock is at 50.12 and the put might be .55 by .60. So now the stock crosses the .15 area and the calls go to .80 to .85 and the puts go to .50 by .55. I would buy the puts at .55 very easily. Now if the stock goes back down through the .15 and the puts go back to .55 bid that's fine, I still picked the calls off for a nickel and I know that I can buy the puts anytime as long as the stock holds the 50 dollar to 5.15 level assuming of course the puts have a 30 delta as well. I'm also using a straddle for this example. So I can hold out and wait for the stock to tick through .15 and grab the puts at .55.

If the stock starts to get weak and starts getting near that figure. I'll probably just go ahead and grab them at .60. Then if the stock breaks through that figure depending on the situation I might pick off some calls at .75 only to see them go .80 bid as the stock goes back up through the figure again. See, I can do this all day. The stock could be all over the place or it could be trending up or down 3 pts and I can just keep buying and legging into the calls and the puts all day long building a nice position.

What do I do when they go against me? It doesn't happen. You have to be very disciplined. Don't get cute. You know what your range is to play with, in this example it's .15 so when the stock looks like it's going to move into a new range, then you have to grab the options before they tick. This is a very good and conservative way to leg into these option at great prices. You are not trying to sell calls on 2 pt rallies then wait for the stock to come in a full pt to buy other calls and so forth. That is not legging in, that is speculating. And if your good at that you are much better off just trading the underlying. Makes sense right?

Thanks again Mav, it was very helpful.
However legging into straddles might be much easier than in flies or ICs due to lower delta at the edges of the wings, right ?
Happens to me many times that OTM does not change or changes very little during whole session.
I know that using your technique you may predict possible clicking price, but sometimes it may require whole day monitoring, right ?
On the other hand I think that better approach to this would be tracking OTM first and legging into long and then trying to scalp something off the ATM or OTM closer to market price ? I believe that by doing this you get some range for ATM, because once you buy OTM right after clicking then you know that OTM will stay at this level for some cents of underlying, am I right ?

 

[Maverick74]

Quote from ChrisM:



Thanks again Mav, it was very helpful.
However legging into straddles might be much easier than in flies or ICs due to lower delta at the edges of the wings, right ?
Happens to me many times that OTM does not change or changes very little during whole session.
I know that using your technique you may predict possible clicking price, but sometimes it may require whole day monitoring, right ?
On the other hand I think that better approach to this would be tracking OTM first and legging into long and then trying to scalp something off the ATM or OTM closer to market price ? I believe that by doing this you get some range for ATM, because once you buy OTM right after clicking then you know that OTM will stay at this level for some cents of underlying, am I right ?

Yes, legging into flies and condors will be a little harder but it's still the same principle. Sometimes it takes me days to leg into a whole position. Just play around with it and see what works best for you. But I think you understand the general idea. Just make sure you leg into your long options first. And don't get too cute. The idea is to just shave a nickel or two off the spread.

 

[TempusFugit]

Quote from Maverick74:



To answer your question, no. If you trade 10 lots or less basically what they do is those orders get broken up and dispersed among all the mm's in the pit. Say you route the order to the cboe and there are 10 locals in that pit. Your 10 lot would get routed automatically to the 10 locals. Each local would get one contract each. He can choose to reject the trade if he wants but they never do for that size. It's only costing him 5 dollars.

OK...helpful as usual...what happens for larger lots? Say, 40 QQQ options?