Exploit Wide Spreads on Corn Options?

C

comintel

I notice that Corn futures options (among others) seem to trade with very wide spreads (maybe 5%).

To attempt to liquidate a previous vertical spread that was deep in the money, I put in a limit order and it was not being filled after days, even when I was offering to give away one half. Finally I just left it to expire eventually.

But this set me wondering if I could not arbitrage some of these options myself by watching for customer limit orders and filling them at somewhat better prices than the quotes being listed. In other words, sort of become a private market maker in a small limited way.

Does this make any sense or have any potential?

Don
 
Arb is certainly possible if you can hedge against a position in the underlying contract.

But if you are thinking of just trading the options and narrowing the spread then you're gonna have a hard time since you'll just be trading against the Market Maker.

Spreads are wide for a reason. Either there is a lot of risk or there is little to no volume. Either way it's a bad situation.
 
Comintel, I like your optimism! Looking for ways to make money off wide bid-ask spreads as a retail trader definitely makes you a "cup half-full" kind of guy.

I really do like your idea. The problem as I see it is that the electronic system for trading commodity options is still not very good.

For example, when you put in your order for the ditm spread, who saw it? If it just went into the pit, retail traders such as yourself never knew it existed.

If it went into the electronic, how was it entered? On IB you can enter such spreads, but my impression is that the IB software tries to leg the spread. I could be wrong, but I don't believe the IB software puts it out on the electronic system as a spread. I believe that such a system exists, but it is virtually unused.

Like you, I look very much forward to the day when the electronic market for commodity options is fully developed, and you and I can sit at home and try to pick off traders who offer ditm spreads at less than fair value. Of course, when that happens, we'll be competing with supercomputers wired directly into the backbone.

In any case, if you can find more details about how your spread order was entered and who had access to it, come back here and we'll strategize.
 
heh.. I just logged in to the forum to post a similiar question... sorta.

you could always try to setup synthetic delta neutral arbitration stratigies.. conversions/reversals.. 0 risk strategies if you can get filled
 
Quote from fredit:

heh.. I just logged in to the forum to post a similiar question... sorta.

you could always try to setup synthetic delta neutral arbitration strategies.. conversions/reversals.. 0 risk strategies if you can get filled
More...

Very interesting.

I am thinking of doing a statistical study of option price tick data to see what opportunities may exist. I could look for what markets show the widest spreads or are giving fills furthest from model prices. I wonder of there are any studies out there on this that have been done already....
 
Quote from dmo:

Comintel, I like your optimism! Looking for ways to make money off wide bid-ask spreads as a retail trader definitely makes you a "cup half-full" kind of guy.

I really do like your idea. The problem as I see it is that the electronic system for trading commodity options is still not very good.

For example, when you put in your order for the ditm spread, who saw it? If it just went into the pit, retail traders such as yourself never knew it existed.

If it went into the electronic, how was it entered? On IB you can enter such spreads, but my impression is that the IB software tries to leg the spread. I could be wrong, but I don't believe the IB software puts it out on the electronic system as a spread. I believe that such a system exists, but it is virtually unused.

Like you, I look very much forward to the day when the electronic market for commodity options is fully developed, and you and I can sit at home and try to pick off traders who offer ditm spreads at less than fair value. Of course, when that happens, we'll be competing with supercomputers wired directly into the backbone.

In any case, if you can find more details about how your spread order was entered and who had access to it, come back here and we'll strategize.
More...

It was placed electronically but I left it sitting there for days through both day and night sessions and it was not filled.

It did show up on IB's spread quotes but I do not know if that was their own or from the exchange. I would guess the exchange but I could be wrong. I am still looking into these aspects....

Thanks.

I am still
 
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