Getting filled on custom options

[darkshogun]

Does anyone trade custom options spreads? TOS offers the ability to make a custom spread but I'm wondering how difficult it would be to get filled on a custom options spread. The guy I talked to seemed to think it would be a problem because the options are not standard spreads and don't have names (like butterflies or condors). Would the following examples 2 custom options spreads be difficult to fill?

Sell 10 SPY 181 PUTS
Buy 14 SPY 187 PUTS
Sell 14 SPY 186 PUTS


And


Buy 20 SPY 186 PUTS
Sell 10 SPY 191 PUTS
Sell 1 SPY 184 CALL

In your opinion would these orders get filled like any other or would they be passed over because they are odd?

 

[SIUYA]

been a while since I used to be a MM and systems have changed, plus I was equities, but if there is enough margin for a MM they will usually hit it and just incorporate it into their books.

A friend still doing it in futures told me its all vol skews and based purely on vol % and how much 'leeway' they are prepared to give on individual legs off their market bids and offers.

 

[StarDust9182]

I am not sure about your exact question. When I am trading I don't really check the name for political correctness. If you have sufficient capital, sufficient option ranking (by the broker) and are willing to pay multiple commissions, for sure you can do anything you would like to do.

I can still remember talking to the "help desk", moving up the line to their "options expert" and spending 10 minutes attempting to explain why I wanted to do a certain leg in a 3 way short calendar strangle. The issue was I had forgotten to check earnings before entering my first leg and I needed to protect the worst case. (That is Christmas tree or calendar decision.)My forecast is what happened (luckily), my third leg protected me as I expected and the "expert" never quite understood a relatively simple explanation. The issue I was asking about was the rules around using the dropbox "sell to open covered" and "sell to open uncovered". I never got an answer I trusted so I gave up just did the spread.

Search out jelly rolls, box spreads, christmas trees etc. The point of options is to control risk pretty much any way you can think of. I have never found a magic trade so learning when to do what is more important.

 

[RichardRimes]

As long as your sticking with highly liquid underlyings like spy you should have no problems.

 

[darkshogun]

The guy I talked to at TOS said he was a floor trader and that if I placed a custom spread order (the example I gave to him was a 4 leg spread consisting of a put butterfly and a single call), they wouldn't know what to make of it because it wasn't traditional and that it might get ignored.

I'm not taking his word for it. I just assumed these kind of orders went through a bunch of computers and algorithms and would be filled mechanically. It's not like it's a giant order after all. Just a 10 put butterfly SPY and 1 SPY call wrapped up in a single 4 leg custom spread.

 

[FXforex]

The guy I talked to seemed to think it would be a problem because the options are not standard spreads and don't have names (like butterflies or condors). In your opinion would these orders get filled like any other or would they be passed over because they are odd?

Nothing odd about your order and the names for your order are standard names, you have:

• Put Debit Spread
• Short Puts
• Put Credit Spread
• Long Puts
• Short Call

I have broken your positions down into their simplest form. The question is do you have the margin for the short 10 contracts 181 Puts and short 184 Call?

Sell 10 SPY 181 PUTS
Buy 14 SPY 187 PUTS
Sell 14 SPY 186 PUTS

• 14 contracts 187/186 Put Debit Spread.
• Short 10 contracts 181 Puts.

Buy 20 SPY 186 PUTS
Sell 10 SPY 191 PUTS
Sell 1 SPY 184 CALL

• 10 contracts 191/186 Credit Spread.
• Long 10 contracts 186 Puts.
• Short 1 contract 184 Call.

 

[darkshogun]

Nothing odd about your order and the names for your order are standard names, you have:

• Put Debit Spread
• Short Puts
• Put Credit Spread
• Long Puts
• Short Call

I have broken your positions down into their simplest form. The question is do you have the margin for the short 10 contracts 181 Puts and short 184 Call?

• 14 contracts 187/186 Put Debit Spread.
• Short 10 contracts 181 Puts.

• 10 contracts 191/186 Credit Spread.
• Long 10 contracts 186 Puts.
• Short 1 contract 184 Call.

The examples I gave were actually examples of trades that would be used to close open positions.

Sell 10 SPY 181 PUTS
Buy 14 SPY 187 CALLS
Sell 14 SPY 186 CALLS

to close this position:

Buy 10 SPY 181 PUTS
Sell 14 SPY 187 CALLS
Buy 14 SPY 186 CALLS

AND

Buy 20 SPY 186 PUTS
Sell 10 SPY 191 PUTS
Sell 1 SPY 184 CALL

to close this position:

Sell 20 SPY 186 PUTS
Buy 10 SPY 191 PUTS
Buy 1 SPY 184 CALL

The original positions put on in this example were a custom 4 leg spread (10 PUT 181/186/191 Butterflies + 1 CALL 184) and 14 PUT 186/187 Debit Spreads.

The reason for the strange combinations given above is that closing out the trade in 2 three-leg custom spreads instead closing out the butterfly, then closing the call, then closing the debit spread individually, leaves less risk on the table should the market violently move while I'm in the process of taking my trades off the table. By first placing an order for

Sell 10 SPY 181 PUTS
Buy 14 SPY 187 CALLS
Sell 14 SPY 186 CALLS

to close open positions, the remaining open positions will have a fairly flat total delta, insulating it from unwelcome market moves while I'm trying to close out all positions. For example, say I take the butterfly off, which was protecting the other positions by flattening out the delta of the other positions, and before I can remove the call and the debit spreads, the market makes a big move and I lose my profit that I got from a month's worth of time decay. I want to avoid this by closing the position via the 2 custom three leg spreads in the original post.

Hence the reason I'm asking if such custom 3 leg spreads would be easily filled on a liquid exchange like SPY. I hope I clarified what I'm trying to say.

 

[darkshogun]

edit on my previous post:

The reason for the strange combinations given above is that closing out the trade in 2 three-leg custom spreads instead closing out the butterfly, then closing the call, then closing the debit spread individually, leaves less risk on the table should the market violently move while I'm in the process of taking my trades off the table. By first placing an order for

Buy 20 SPY 186 PUTS
Sell 10 SPY 191 PUTS
Sell 1 SPY 184 CALL



Here is a visual of the hypothetical trade. For purposes of the example lets say the price of SPY is at 191 on March 30th. I want to take the profit and close out the entire strategy. Here is what the current trade looks like:

Now lets say I begin the process of closing out the strategy and I start by closing out the 181/186/191 Put Butterfly. I'm left with a very bad looking, risky position after the butterfly is closed out. What if the market moves against me after I close the butterfly but before I close out my 184 Call and my 187/186 Call debit spread?

The reason I'm asking about getting fills on unusual custom spreads is for this reason. In this particular example, if I start by closing out these three positions in a custom 3 leg spread :

20 SPY 186 PUTS
10 SPY 191 PUTS
1 SPY 184 CALL

I'm left with this very nice looking risk profile that should allow me to retain my profits from the strategy without subjecting myself to unnecessary risk while closing out the rest of my open positions:

 

[SIUYA]

The guy I talked to at TOS said he was a floor trader and that if I placed a custom spread order (the example I gave to him was a 4 leg spread consisting of a put butterfly and a single call), they wouldn't know what to make of it because it wasn't traditional and that it might get ignored.

I'm not taking his word for it. I just assumed these kind of orders went through a bunch of computers and algorithms and would be filled mechanically. It's not like it's a giant order after all. Just a 10 put butterfly SPY and 1 SPY call wrapped up in a single 4 leg custom spread.

on the floor where you had to add things up, or where there were so many orders and people were manually filling them yes, maybe, but on computers these days normally a lot of trades are automatically hit with electronic eyes rather than people clicking the mouse.
Reality is that MM are generally constantly putting on these types of trades all the time via individual trades. Constantly spreading and hedging.
Often its a simple matter of being willing to pay the right price, and if MM have gone back to ignoring good spread prices then its time to go back to being a MM

 

[StarDust9182]

The guy I talked to at TOS said he was a floor trader and that if I placed a custom spread order (the example I gave to him was a 4 leg spread consisting of a put butterfly and a single call), they wouldn't know what to make of it because it wasn't traditional and that it might get ignored.

I'm not taking his word for it. I just assumed these kind of orders went through a bunch of computers and algorithms and would be filled mechanically. It's not like it's a giant order after all. Just a 10 put butterfly SPY and 1 SPY call wrapped up in a single 4 leg custom spread.

Key phrase .... WAS a floor trader .... See my previous story about help desk experts ( and some ET posters). He may be a good meaning fellow but he is just wrong. If I am willing to pay commission, I have a market button and the other side will damn well take the other side no questions asked. Options also have HFT although some posters like to pretend they don't.

I think that in your story, you are talking slightly about something else. The liquidity of options turns out to be a KEY consideration and few will tell you much about it. (Stocks and futures are different and many newbies will insist on only the most liquid stocks to make money.) When I stalk certain trades types and particularly under certain key market conditions, I often enter a trade I like outside the bid ask and let it sit. When I see what I like, I will execute instantly at market. I have noticed that option bid ask people will play games and not fill at time on a wide spread. My market button HELPS them along for better fills. Most times of course my limit offers go unfilled and drop at end of day. MMs don't go looking for trouble, only for profitable trades.

For example on the highest SPY volume day in December, I filled a tiny market order on short 176 SPY March puts at 3.88 (I would have to go back to check the price for sure) using this technique. The confirmation that the price was near the top was the refusal of the other side to take the trade no matter easy I made it for them. The other side moved the bid/ask to not fill my order and of course they will tell you they never do such thing. (Under most market conditions, limit fills are easy). The market button worked and by the end of the day I was in the green (pun intended).

The moral: besides knowing all the terms and the market conditions you must REALLY understand what liquidity means and is. I am not comfortable talking much about things I have learned by spending my own money.