Can someone please explain why this trade is going wrong?

J

jim.thornton

I've been studying options for the last couple of weeks. Last week I decided to open an excel spreadsheet to track trades that I was interested in and would have possibly made was I doing it live.

I have done quite well in my trades, but the TSX 60 put spreads are puzzling me. The market is down over 2% today and the put bid price is going down too. The ask price is going up, but the bid price is going down and I can't understand it. I have a theory that the bid/ask spread was too big when I put the trade on.

Here are the details:
Trade date: 12/3/2015
Expiration: 1/15/2016
Contracts: 1
Buy to open: Strike 790
Sell to open: Strike 785
Net debit: $2.85
Current bid: $1.40
Current ask: $4.95

So, as you can see I'm currently down. My direction and target was dead on, but my outcome is totally unexpected.

In comparison, I also placed the following trade (in excel):
Trade date: 12/4/2015
Expiration: 12/18/2015
Contracts: 1
Buy to open: Strike 780
Sell to open: Strike 760
Net debit: $6.40
Current bid: $8.35
Current ask: $10.85

In the second trade I am up 30.4% but in the first trade I'm down 64.9% with the same market move.

If someone could tell me why this is happening, that would be great.

FYI - When entering the spreadsheet. I'm using the worst case numbers. Buy @ the ASK and sell at the BID. And, as mentioned, it is working out quite well with a W/L record of 5/7 for the Debit Call Spreads. I have only closed 5 positions in the spreadsheet so far, so that is good. One I put on today and the other hasn't gone in the direction I expected yet, but I still have about 10 days on that one.
 
You can't imply any meaning when you have really wide spreads like that. I would stick with symbols with narrower more liquid spreads.
 
I have noticed that the spread really widens on some poorly liquid options when the strike price moves away from the underlying
rmorse it so right...playing illiquid options is for suckers; stick with options with high volume only
 
jim.thornton said:
I've been studying options for the last couple of weeks. Last week I decided to open an excel spreadsheet to track trades that I was interested in and would have possibly made was I doing it live.

I have done quite well in my trades, but the TSX 60 put spreads are puzzling me. The market is down over 2% today and the put bid price is going down too. The ask price is going up, but the bid price is going down and I can't understand it. I have a theory that the bid/ask spread was too big when I put the trade on.

Here are the details:
Trade date: 12/3/2015
Expiration: 1/15/2016
Contracts: 1
Buy to open: Strike 790
Sell to open: Strike 785
Net debit: $2.85
Current bid: $1.40
Current ask: $4.95

So, as you can see I'm currently down. My direction and target was dead on, but my outcome is totally unexpected.

In comparison, I also placed the following trade (in excel):
Trade date: 12/4/2015
Expiration: 12/18/2015
Contracts: 1
Buy to open: Strike 780
Sell to open: Strike 760
Net debit: $6.40
Current bid: $8.35
Current ask: $10.85

In the second trade I am up 30.4% but in the first trade I'm down 64.9% with the same market move.

If someone could tell me why this is happening, that would be great.

FYI - When entering the spreadsheet. I'm using the worst case numbers. Buy @ the ASK and sell at the BID. And, as mentioned, it is working out quite well with a W/L record of 5/7 for the Debit Call Spreads. I have only closed 5 positions in the spreadsheet so far, so that is good. One I put on today and the other hasn't gone in the direction I expected yet, but I still have about 10 days on that one.
More...

Especially if your working the TMX, it's bid/ask spreads are brutal. Probably part of the reason the liquidity is so poor, b/a spreads are way, way too wide. Even on options that are transposed with the U.S.

Best best is try and stick with major CDN banks and telecoms or anything with minimum 10,000 - OI. I wrestle with this every day.

Good luck!
 
IMO ....... The volume and bid/ask spread on Canadian options is not favorable to the trader. I would switch to SPY, QQQ or DIA options.

Yahoo Finance is a good place to setup a free option paper trading account - no need to enter data into excel.




:)
 
Thank you for the update. When I first started doing this I wasn't really paying too much attention to the bid/ask spreads. Then I noticed the closer spreads were better. But the TSX 60 still puzzled me because I thought that it would jump up when it got close, but I guess that's why you paper trade. LOL

Thanks for the head's up on Yahoo. I'll check it out.
 
I can't seem to figure out the Yahoo Options tracker at all. I can see how to add holdings to your portfolio but not how to add a call spread or put spread.
 
Yes it's due to a bad fill price and bad current price print because of low liquidity. But you knew that, so good on ya, learning fast ! :)

I'd recommend you just go ahead and open up a trading account, likely an international account with Interactive Brokers or TD Ameritrade / Thinkorswim. Fund it with the minimum amount.

That way you can actually live trade a "paper account" and it's much more realistic on the fill prices you'd be getting. Tracking everything on an excel spreadsheet is a little old school isn't it?
 
I don't understand at the moment how the spreads can be so low on liquid options, say Nikkei-225. I don't trust my volatility forecast to a better accuracy than 2-3%. Then, dynamic hedging will add even more variance to that already poor estimate. So in order to stand a reasonable chance of making money in the probable way and counter the very real possibility that one big move wipes out all my previous earnings, I'd have to add a fat margin there, at least 5%. Rationally, if I think volatility is in the 30% range, I wouldn't sell at less than 35% and buy at more than 25%. So I get why the illiquid markets have such wide spreads, the market makers there are taking less risk.
 
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