¿how can one deal with incomplete option chains?

[rtw]

regards to the experts who share valuable, constructive contributions in this forum.


i have been trading options for something like 18 months now. there are some symbols that are the most traded by the masses and every contract in their option chain has an outstanding quote for bid and ask at all times, and their spreads also tend to be mostly reasonable. i have screened for symbols with those characteristics and those are the only ones i trade. i operate under the assumption that for those contracts, the value halfway between the bid and the ask (midprice, midmarket, midpoint) is the closest one can get to a fair price or model price for any contract.


in contrast, there are a lot of individual stocks and practically all futures contracts where market makers cannot be bothered to offer quotes for bids or asks.


to illustrate this point, i share the option chain for aapl where every single contract has a quote for bid and ask at all times:

and the following are the option chains for mkl and the rb futures contract respectively:

if i wanted to place a trade in mkl or rb options, ¿how could a retail trader bid a reasonable amount for any of those contracts? ¿is it possible for a retail trader to have an approximation of the fair price or model price value? ¿is it possible for retail market participants to somehow approximate the pricing models that market makers use?


this is a situation that i have given a lot of thought to, it would be great to know the perspectives of the most knowledgeable experts regarding options contracts in these fora.


very well, thanks, regards.

 

[tommcginnis]

Even if you *found* a 0-miles perfect condition (grande concourse) Delorian AT A 'FAIR' PRICE, would you want to buy it?

If you just wanted to drive the car, then Yes! And you'd do backflips at your outrageous luck.
But if you wished to *collect* the car? That's harder -- you'd have to be patient at selling it.
What if you just wished to buy-to-resell? That's much much harder -- the liquidity would kill your chances of an easy exit -- a fair *selling* price would be lucky.

Same thing, here.

 

[rtw]

mr. mcginnis,


you have something of a point here.


from experience i know that to open a long position in markets as deserted as the ones i describe, one can start with orders with very low prices and progressively increase them in small amounts. somewhere around fair price there will be some participant that will indeed sell the desired contract. this process can be reversed when trying to sell, one can start placing orders with excessive prices and work down from there. there will be a price when counterparties will sell or buy no matter how thinly traded an instrument is.

however, there must be better ways to do this instead of blindly placing orders until one ends up being executed. and being able to approximate market makers' pricing models would be greatly valuable to avoid overpaying for contracts when volatility spikes happen.

 

[murray t turtle]

%%
1] Best way=record + chart your own data;
2] + underlying stock/ETFs also...................................................................................Do both, but only if you're interested in profits.

 

[PoopyDeek]

mcginnis is an idiot. I would suggest placing him on ignore.

Listed equity vol should always display a mkt. Futures options not so much.

You need to solve for the synthetic/conversion market. For example, you're looking for the fairval on the 80D call but the futures options aren't indicative. You take the mid of the same-strike put (-20D) and add that value to the intrinsic value of the call. Futures at 1050. 1000P at 3. 1000C = 53.

Price the ATM synthetic to value the carry.

Synthetic (forward) trading at 1051. 1000P at 3. 1000C = 54.

You'll need a futures mark and a mkt in one of the options at a strike. You can interpolate if you don't have either, but skew will play a role.

 

[murray t turtle]

mcginnis is an idiot. I would suggest placing him on ignore.

Listed equity vol should always display a mkt. Futures options not so much.

%%
Many don't have enough volume or any volume; but that maybe be a clue also...............................................................................................................

 

[PoopyDeek]

%%
Many don't have enough volume or any volume; but that maybe be a clue also...............................................................................................................

I get the axiom, but there are often gaps in liquid stuff.

 

[ajacobson]

Have you had a conversation with your broker/data vendor? AAPL trades on all 16 option exchanges with (guessing) at least 10 Market Makers streaming. One and only one data vendor - OPRA. Every exchange has some continuous quoting requirement and it is common for the deeps and the cheaps to not update, but a quote is till streamed. Some exchanges filter updates to reduce traffic, but that is size not price. Stale quote - sure. System outages sure and the exchanges provide what is back up for one another. OPRA hiccups occur fairly frequently, but I would query your broker. Is this systemic in your chains?

 

[rtw]

mcginnis is an idiot. I would suggest placing him on ignore.

Listed equity vol should always display a mkt. Futures options not so much.

You need to solve for the synthetic/conversion market. For example, you're looking for the fairval on the 80D call but the futures options aren't indicative. You take the mid of the same-strike put (-20D) and add that value to the intrinsic value of the call. Futures at 1050. 1000P at 3. 1000C = 53.

Price the ATM synthetic to value the carry.

Synthetic (forward) trading at 1051. 1000P at 3. 1000C = 54.

You'll need a futures mark and a mkt in one of the options at a strike. You can interpolate if you don't have either, but skew will play a role.

well, in the time i have been a member in this forum, mr. mcginnis has always been one of the regulars in the options section who are helpful and generous with their knowledge.


and i see the points you make but there are a lot of individual stock symbols where there are practically no quotes to work with (that is the case with symbols where only monthly contracts are available and a big percentage of those with weekly contracts).

and the method you propose would not be very practical. for example, if market makers are going to just leave one half of an option chain without consistent bid and ask quotes it will be the otm contracts. itm contracts have inherent intrinsic value and market makers will never let them be traded for less than that amount.

in addition, calls and puts are not perfectly symmetrical, during an uptrend mfing market makers will increase prices for all calls and will do the opposite during a downtrend or volatility spike.


i have been collaborating to develop a system to trade options automated. if i wanted to trade options on futures i need competitive bid - ask spreads and consistent quotes for the program to work with. unless i could find a way to approximate the models that market makers use to generate quotes i could never trade options on futures automated, or even by hand when market makers can't be bothered to generate quotes for those contracts.

 

[rtw]

Have you had a conversation with your broker/data vendor? AAPL trades on all 16 option exchanges with (guessing) at least 10 Market Makers streaming. One and only one data vendor - OPRA. Every exchange has some continuous quoting requirement and it is common for the deeps and the cheaps to not update, but a quote is till streamed. Some exchanges filter updates to reduce traffic, but that is size not price. Stale quote - sure. System outages sure and the exchanges provide what is back up for one another. OPRA hiccups occur fairly frequently, but I would query your broker. Is this systemic in your chains?

mr. Jacobson,

i have accounts both with ib and tradestation and the lack of quotes for most contracts for most symbols is quite pervasive (not to mention the mfing 0 - 500 bid ask quotes for the entire otm half of an option chain or the itm half with the bid ask spread being as high as 60% of the value of the contract).

in the case of options on futures, some atm contracts will have a fairly consistent stream of quotes but the rest of the option chain is just blank. i always figured that market makers do this to force traders to trade in the futures market proper.

i will ask the people with ib about these situations but i won't expect much. every time i have raised any issue regarding options with the ib staff i have found that they don't know very much about these particular markets.