Can you predict the contract with the lowest spread or is it just random?

[nooby_mcnoob]

I'm trying to find a pattern here... Midpoint (dark blue) and spared (light blue).

Best I can think of is that it is a somewhat fixed percentage of the price of the option which is absolutely ignored during hectic times. Today, I rode the 302 put from 1.6 to 2.0 but my profit was like .25 b/c of the spread.

I don't know how to reliably choose the right contract to trade. This is getting extremely frustrating and unpredictable.

Thanks bros.

 

[kj5159]

I'm learning in options myself but this far I've concluded that there just needs to be more profit involved to make up for the spreads. SPY is about as liquid as you're gonna get. I'm sure you already know but deep ITM spreads are usually way bigger than nearer the money or ATM etc.

 

[nooby_mcnoob]

I'm learning in options myself but this far I've concluded that there just needs to be more profit involved to make up for the spreads. SPY is about as liquid as you're gonna get. I'm sure you already know but deep ITM spreads are usually way bigger than nearer the money or ATM etc.

Thanks but it seems wrong for spreads to be so wide for liquid contracts...

 

[kj5159]

That is a big spread... 25 cents on a ~$2 contact is nuts. Are you using limit orders?

 

[Matt_ORATS]

I'm trying to find a pattern here... Midpoint (dark blue) and spared (light blue).

Best I can think of is that it is a somewhat fixed percentage of the price of the option which is absolutely ignored during hectic times. Today, I rode the 302 put from 1.6 to 2.0 but my profit was like .25 b/c of the spread.

I don't know how to reliably choose the right contract to trade. This is getting extremely frustrating and unpredictable.

Thanks bros.
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What you will find is that in times when the market is moving quickly, the market makers will widen out the markets. You will also see that near the close bid-ask spreads will widen. I say this as a past market maker on the Cboe.

With our backtesting database we take snapshots of the entire options market 14-minutes before the close. We do this to ensure that the markets are not widening out because of the lack of liquidity in the underlying near the close.

What is in the graph below, is a candle stick SPY graph with options volume, and in the second graph is the bid-ask spread in volatility terms. You can see the big spike on Dec-24th and on Oct-11th in 2018. This is an example of the markets widening when the market is volatile.

By the way, this graph is a soon to be released feature of our data API that can graph and make trading triggers out of all of our data sets as in: https://docs.orats.io/data-api-guide/definitions.html

 

[HobbyTrading]

What you will find is that in times when the market is moving quickly, the market makers will widen out the markets.

I have seen similar things for stocks. If a ticker had some sudden news which increased the stock's volatility, also the bid/ask spread became larger.

 

[nooby_mcnoob]

That is a big spread... 25 cents on a ~$2 contact is nuts. Are you using limit orders?

Turned out it wasn't so wide, it was 10 cents due to the spread. But had I not used limit orders, it would have been worse.

 

[kj5159]

Turned out it wasn't so wide, it was 10 cents due to the spread. But had I not used limit orders, it would have been worse.

Gotta use limit orders for options or you'll get killed by the spread every time. I think you're all automated if I remember correctly from your other threads (?) but I work my orders (manually) and it makes a huge difference. Depending on the underlying and the day you can get filled at mid or better. I actually like some less liquid/illiquid/bigger spread names for this reason, on LYFT for example I've gotten numerous fills halfway between the better side of the mid and bid/ask (buy at halfway between bid and mid etc.). If I had a larger account I could be making a lot of money just from working buy/sell orders on big spreads.

May not be best practice but what I usually do is pick my option/spread and enter my opening limit buy at the bid or limit sell at the ask and wait a minute or few minutes depending on the way it's trading and then if not filled yet move my limit closer to mid by a hair, repeat until filled.

And remember you have to deal with the spread on both the entry and exit!

 

[HobbyTrading]

May not be best practice but what I usually do is pick my option/spread and enter my opening limit buy at the bid or limit sell at the ask and wait a minute or few minutes depending on the way it's trading and then if not filled yet move my limit closer to mid by a hair, repeat until filled.

I do something similar in my automated trading system, but for futures and ETFs (I don't trade options). If the bid/ask spread is more than one "minimum price step" I shoot a limit order with a limit halfway between bid and ask. Then I wait for a maximum of one minute. I often get filled in this way. I use this approach both when entering a position and when exiting a position.