Etrade options marking methodology

N

newwurldmn

etrade users:

You may or may not be aware but Etrade has changed the way they mark options.

They used to use the following algorithm:
If last trade is between bid/ask then mark=last trade
Elseif last trade < bid then mark=bid
Else Mark=ask

Now they are just using mid price.

The problem is that the option markets for single stocks are unstable. Often prices widening out a lot - one of my underlyings went from .30 at .80 to .30 at 5.00. Under the new methodology my mark moved 2 dollars on a market maker pulling his offer.

This is adding siginificsnt intraday noise to my book and for a less capitalized account could lead to an unnecessary margin call.

Are others who use Etrade experiencing more volatility in their options portfolios these days?
 
IMO, midpoint over all is the most accurate and fair place to mark options. You will get nasty marks with options with wide spreads. I have a few clients that trade the VIX ETFs and many marks go out $.20-$4.00 that are trading at $0.35. Keep in mind from the viewpoint of the clearing firm or broker, that if your account were to go below zero, it is likely they would have to establish a loss following a pre-set procedure. That procedure is often MOO, MOC or a market order. Illiquid options with wide spreads have more risk for all.

Wedbush in the past used the bid for longs and the offer for shorts. We fought hard to get mid point. Wedbush just changed to mid point in September. Overall, I'm very happy with that, Those trading options with wide spreads should understand the risks to liquidation and marks.

Bob
 
Robert Morse said:
IMO, midpoint over all is the most accurate and fair place to mark options. You will get nasty marks with options with wide spreads. I have a few clients that trade the VIX ETFs and many marks go out $.20-$4.00 that are trading at $0.35. Keep in mind from the viewpoint of the clearing firm or broker, that if your account were to go below zero, it is likely they would have to establish a loss following a pre-set procedure. That procedure is often MOO, MOC or a market order. Illiquid options with wide spreads have more risk for all.

Wedbush in the past used the bid for longs and the offer for shorts. We fought hard to get mid point. Wedbush just changed to mid point in September. Overall, I'm very happy with that, Those trading options with wide spreads should understand the risks to liquidation and marks.

Bob
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Occasionally I would have an option that would be marked on the bid or the ask for days because there would be no trade on that line but that only created an artifact pnl the first day and after that day to day marks would be in line. Now my pnl is swining by 70bps intraday just on these .2-4.00 blowouts. It gets hard to see what's driving the pnl on a pretty complex options book.

My problem isn't options that have wide spreads. It's spreads that blow out for microstructure reasons.
 
truetype said:
If an option is worth 0.50 but shown 0.25- 5.00, what stops you from yourself offering 0.75?
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The risk of actually trading. The fact that I would have to do this constantly intraday creating more work than studying each position as it goes out of whack.
 
truetype said:
If an option is worth 0.50 but shown 0.25- 5.00, what stops you from yourself offering 0.75?
More...
Its a nice idea but of course you start acting like a market maker in that case. Whilst there is nothing wrong with that you better keep an eye on the market at all times. If a big move occurs while you are on the golf course your account might suffer.
 
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