How to deal with wide options spreads in volatile markets?

N

nwoptions

Hi all, I bought puts for Dow yesterday. I expected the market to gap down today due to the dividend. From my research, the market gaps down on dividend day 65% of the time.

The bid yesterday for the DOW June 16th expiring 50 strike price was 1.41. The asking price was 1.49. That's an 8 cent spread. Not the best, but not too bad either.

Today at 9:30am EST, the bid was 1.19 and the ask was 1.57.

I was expecting the bid to be much higher than 1.19. Instead of looking at a hefty profit, I was looking at a major loss.

How do you combat wide spreads in volatile markets?

If I used a limit order this morning of, say, 1.56 (a 5% gain), would my order get filled?

Thanks
 
In interactive brokers TWS option trader add the model price between bid/ask. Then walk your bid/ask towards the model price to get filled.
 
nwoptions said:
Hi all, I bought puts for Dow yesterday. I expected the market to gap down today due to the dividend. From my research, the market gaps down on dividend day 65% of the time.

The bid yesterday for the DOW June 16th expiring 50 strike price was 1.41. The asking price was 1.49. That's an 8 cent spread. Not the best, but not too bad either.

Today at 9:30am EST, the bid was 1.19 and the ask was 1.57.

I was expecting the bid to be much higher than 1.19. Instead of looking at a hefty profit, I was looking at a major loss.

How do you combat wide spreads in volatile markets?

If I used a limit order this morning of, say, 1.56 (a 5% gain), would my order get filled?

Thanks
More...
Simply off your computer for a day.

Then turn it on the next day.
 
You can trade inside, or out, with limit orders.
Like entering the 1.56 and if you don't get a fill, move it toward mid/bid.
Normally you can get quick to instant fills at mid in liquid options.
Spread might improve if you trade away from volatility events, news, open/close... but sometime you might get a good deal doing that.
 
nwoptions said:
Hi all, I bought puts for Dow yesterday. I expected the market to gap down today due to the dividend. From my research, the market gaps down on dividend day 65% of the time.

The bid yesterday for the DOW June 16th expiring 50 strike price was 1.41. The asking price was 1.49. That's an 8 cent spread. Not the best, but not too bad either.

Today at 9:30am EST, the bid was 1.19 and the ask was 1.57.

I was expecting the bid to be much higher than 1.19. Instead of looking at a hefty profit, I was looking at a major loss.

How do you combat wide spreads in volatile markets?

If I used a limit order this morning of, say, 1.56 (a 5% gain), would my order get filled?

Thanks
More...

The bid ask spread is always wider at the open. Market makers don’t know which side (bid or ask) they might get hit on when the market opens. Wait for the market to narrow, which should be there an hour after the open.

You can also enter a limit price at the mid point of the bid and ask. You’ll probably be at that price all by yourself, and it’s usually the true value with profit compared to theoretical value built-in on both sides of the bid ask spread.

Also, a few traders may be desperate to get long or short, and they will execute on anything near fair value - so there’s an ok chance that you might get filled near the midpoint.
 
cesfx said:
You can trade inside, or out, with limit orders.
Like entering the 1.56 and if you don't get a fill, move it toward mid/bid.
Normally you can get quick to instant fills at mid in liquid options.
Spread might improve if you trade away from volatility events, news, open/close... but sometime you might get a good deal doing that.
More...

Thanks for the reply cesfx. From your experience, what are the odds that my limit order of 1.56 will get filled if the current bid for the put is 1.19? Is it almost impossible to do? Thanks
 
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