Determining Limits On Spreads

Arnie Guitar

Arnie Guitar

The past two days I placed several orders for simple S&P vertical bull put spreads and the orders were canceled. I called up tonight and was told my credit limits were too high. I've always used the "last" price posted to determine which options to pick and the credit limit. I was told to use the "bid" for the sell and the "ask" for the buy. Hmph...I wasn't trying to be greedy or unrealistic...many orders have been filled in the past...I guess I'll do things different from now on.

Hmph...:confused:
 
Well, after looking things over, that only works on the front month, and not by much. All of the following months, fuggettaboutit...

I guess I'll have to call bullshit on what I was told, and use smaller limits.
 
I'm a bit mystified by what you are describing. Did you have insufficient cash in the account to cover the margin requirements? Were you legging into the spread or trading it as a spread?

I've only run into problems with respect to having my limit order rejected on a spread trade was because of a miscalculation by the broker software. One leg of the spread was next to another spread leg and the broker tried to calculate margin based on it being a butterfly spread rather the spread completing an Iron Condor.
 
I had plenty of money to cover the margin req.

For example:

Let's say the last price on the Jan 14 1260 put was .50,
and the last price on the Jan 14 1250 was .25.
The spread is .25.
I'd submit an order with a limit of .20, and wouldn't get filled.
 
I don't quite understand what was going on here either.

You might have to give more information.

From what you are saying the spread is .25, yet you are only asking for .20? You said Bull Put spread right, so a credit spread? Normally a person would then ask for .25 or higher, not lower - maybe your example was off?

Other things I could think of that could possibly cause confusion -
Did you by any chance mix up the positions, so trying to sell the lower put and buy the higher one, and still ask for a credit? Of course, that would be a debit position.

Also, what exact index or symbol were you using - for example SPY? SPX? Could it have been there were adjusted (non-standard) contracts that you were selecting somehow?

The terminology you use and maybe the person on the phone used of "credit limit" is confusing (sounds like a Credit Card). Better is "limit credit", but again, are you sure the position was setup to where credit makes sense. Also, a person should be able to put in an order for a price far from the current, and not have it be canceled on them - so I have to wonder if something else is wrong????

It does make sense NOT to use the LAST value, as that potentially could be far from the current bid/ask, however, if the options you were trying to trade are active (I would think so for an index), that wouldn't seem too likely.

Just some of my thoughts and guessing.

JJacksET4
 
Quote from Arnie Guitar:

I had plenty of money to cover the margin req.

For example:

Let's say the last price on the Jan 14 1260 put was .50,
and the last price on the Jan 14 1250 was .25.
The spread is .25.
I'd submit an order with a limit of .20, and wouldn't get filled.
More...

what if the last time the Jan 14 1260 traded was yesterday and the last time Jan 14 1250 traded was a week ago? your last prices are useless.

also are the SP eminis? dont they tick in quarters
 
Last price quotes can be stale. For illiquid options, they may not correlate with current price of the underlying.

Determine the natural price of the spread for buying and selling (B-A and A-B). A reasonable order is splitting that. Asking for a little more on a sale or a little less on a buy is more aggressive - it's good if you're filled but it lowers the chance of a fill. Any platform that tosses out an order like that should be tossed.
 
Are you trying to BUY this put spread for a credit? A change was made awhile ago so you can no longer enter this type of spread into the CBOE spread book in the SPX.
 
Quote from spindr0:

Last price quotes can be stale. For illiquid options, they may not correlate with current price of the underlying.

Determine the natural price of the spread for buying and selling (B-A and A-B). A reasonable order is splitting that. Asking for a little more on a sale or a little less on a buy is more aggressive - it's good if you're filled but it lowers the chance of a fill...
More...

Thank you, somebody gets what I'm talking about. I will try that.



Just to be clear on the specific order I placed.

I placed an order to:

Buy the $SPX.X Jan 14 1250 Puts
Sell the $SPX.X Jan 14 1260 Puts

I specified a net credit of .27 cents

At that time the "last" price quoted for the 1250's was .30, and the "last" price quoted for the 1260's was .62, so that difference was +.32 .

I was told my order was canceled because according to the data at that time, the difference was +.14 , but I'm not clear on what they were using, clearly it wasn't the "last" price.

I would not place an order for a difference more the the difference between the "last" quoted price. I thought I was placing an order for a difference .05 less than the difference at the time, but according to my broker the diff was +.13 .
 
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