How theoretical is the Midpoint?

[ironchef]

Where are you paying $.25 for options?
I currently use tastyworks as they cap commissions at $10 a leg and don't charge to close, which I think is pretty amazing

Schwab. $0.25 per contract, if I trade more than 1 contract, the commission per contract is less, on a sliding scale.

Of course I trade a lot and don't know if they give me special rates because of that.

 

[Matt_ORATS]

Hi ET!

I am doing a little optimization surrounding slippage and avoiding it on 4 legged orders, and I realized that I don't exactly understand how my orders get filled in between bid and ask.

I realize now that really the best way to avoid this slippage is allow my trades slightly more time in the ether, which means calculating expected move a little earlier, incurring more risk of the underlying moving towards my strikes before close, but probably worth more favorable fills since slippage affects negatively affects positive and negative trades, really jacking up expectancies/averages.

Anyway, I am salivating over the beautiful TOS UI, the trade grid in particular, and I see 6 exchanges and the quantity/price they are willing to buy or sell these contracts at:

View attachment 216349

Lets say bid is .10 and ask is .16

I am selling, so the relevant price is the asking price, and the ask price is the lowest price any of these exchanges are willing to sell to me at a moment in time, so how can any seller expect to get filled at anything above .10 without the market moving and the price of the option changing? Where are these orders/fills coming from? Retail Investors? Some dark pool somewhere? Market makers post their best orders on these 6 exchanges, so where do midpoint fills come from?

Lightfightercap
If you have a resting order there are many participants who subscribe to the complex order books and will fill your order if it meets their edge requirements.

Our backtester had slippage assumptions based on our fill experience as follows:
Slippage is the extra amount paid or the smaller amount received for an option bought or sold compared to the middle of the options bid-ask. We use a percentage of the options bid-ask spread to represent this amount and the percent slippage is different depending on how many legs there are in the trade.

The slippage formula to buy is: Bid + (Ask - Bid) * slippage%

The slippage formula to sell is: Ask - (Ask - Bid) * slippage%

The following table explains the default method to calculate slippage on entering and exiting a trade:

# of Legs Slippage % bid x ask Buy Trade Price Sell Trade Price
1 .75 1.20 x 1.40 1.35 = 1.20 + (1.40-1.20) * .75 1.25 = 1.40 - (1.40-1.20) * .75
2 .66 5.10 x 5.90 5.628 = 5.10 + (5.90-5.10) * .66 5.372 = 5.90 - (5.90-5.10) * .66
3 .56 4.20 x 5.20 4.76 = 4.20 + (5.20-4.20) * .56 4.64 = 5.20 - (5.20-4.20) * .56
4 .53 8.50 x 10.30 9.454 = 8.50 + (10.30-8.50) * .53 9.346 = 10.30 - (10.30-8.50) * .53
According to the table above: for a 1 leg option trade like buying a call, the default slippage is 75% of the bid ask width; for a 2 leg trade like a put spread vertical the slippage would be 66% of the total bid-ask spreads; for a 3 leg trade like a butterfly, slippage would be56% of the bid-ask width for all legs; and finally a 4 leg iron condor would have a slippage of 53%.