How to deal with wide options spreads in volatile markets?
- Thread starter nwoptions
- Start date
1. Add "Mark" price/column to your options chain:
The vicinity of Mark price is usually realistic to fill +/- couple cents, depending on liquidity.
2. The Bid & Ask by themselves don't matter much since if the bid was $1.19 and you'd place a bid at $1.25 then the next person would see the $1.25 as the bid, then another person might place their bid at $1.30 and so on, not knowing that the original bid was at $1.19 and who placed it, and why. So each person would make different conclusions from the bid price, none of them correct or usueful. Just seeing someone else's bid doesn't tell you anything about the actual price the market makers are willing to accept. Though usually only market-making computers are placing bid/ask orders with sometimes wide bid/ask spreads to give themselves room in case of sudden moves, arb attempts, etc. But they will usually accept the price close to the mid.
As soon as you place your own order then it goes to 100ms auction between market making computers and they'll decide whether it's worth that much to them. They compete and usually will accept a fair price if they can make couple cents in profit (on a liquid stock). Though they may first try to hedge their risk by securing some shares (or another option contract), so the value of the option will often be determined by MM's ability to hedge.
2a. Since MMs hedge their risk, you could do the same instead of closing/selling the put right away. For example by buying approx 50 shares (or whatever the Delta is) and later trying to close the position as a combination of put+shares.
3. Throughout the day this option seemed to be worth between $1.40 (morning open) and $1.8 (an hour after market opened) based on the mid-price (between bid/ask), which should be realistic and close to the Mark price if the spread wasn't too wide / or no other people placed orders to buy/sell the same option. You should be able to easily sell your put near the shown mid price(s).
The vicinity of Mark price is usually realistic to fill +/- couple cents, depending on liquidity.
2. The Bid & Ask by themselves don't matter much since if the bid was $1.19 and you'd place a bid at $1.25 then the next person would see the $1.25 as the bid, then another person might place their bid at $1.30 and so on, not knowing that the original bid was at $1.19 and who placed it, and why. So each person would make different conclusions from the bid price, none of them correct or usueful. Just seeing someone else's bid doesn't tell you anything about the actual price the market makers are willing to accept. Though usually only market-making computers are placing bid/ask orders with sometimes wide bid/ask spreads to give themselves room in case of sudden moves, arb attempts, etc. But they will usually accept the price close to the mid.
As soon as you place your own order then it goes to 100ms auction between market making computers and they'll decide whether it's worth that much to them. They compete and usually will accept a fair price if they can make couple cents in profit (on a liquid stock). Though they may first try to hedge their risk by securing some shares (or another option contract), so the value of the option will often be determined by MM's ability to hedge.
2a. Since MMs hedge their risk, you could do the same instead of closing/selling the put right away. For example by buying approx 50 shares (or whatever the Delta is) and later trying to close the position as a combination of put+shares.
3. Throughout the day this option seemed to be worth between $1.40 (morning open) and $1.8 (an hour after market opened) based on the mid-price (between bid/ask), which should be realistic and close to the Mark price if the spread wasn't too wide / or no other people placed orders to buy/sell the same option. You should be able to easily sell your put near the shown mid price(s).
No sweat, I learned those things here.
Check guru reply as it is more detailed. I will add mark to my column too.
And yeah... I would not expect a fill a 1.56 unless spot moves a bit in yout favour or someone pick up the order. Mid is the expectation but trying for a better fill and adjusting is often what I do,
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A few notes:
1. Posted markets are typically wide on the open, especially on a long weekend with the debt ceiling agreement. You will likely be able to trade inside. Alternatively, you could have delta hedged and then unwound the whole thing when the bid/offer tightened.
2. is your study on the gap down in excess of the divdend payout? While stocks selloff, the forwards, off which options price, do not. The stock selloff due to the dividend is not arbitrageable, nor is the option move related to this "delta."
Couple of things..
Your title of Volatile markets would lead one to believe you are trading a volatile asset..
I wouldnt consider DOW a volatile asset and its IV30 is trading apx 27%...
Your wording of Gap down is a bit confusing..When you say gap down 65% of the time,how are you defining gap??? By the ex div amount?? Is that a GAP in your opinion? That would not be a GAP and it is already priced into the options model
Ild like to know how you came up with this 65% gap frequency.
Not sure when you bought your option,but a 3 day weekend typically doesnt bode well for long options ..
And you have zero chance of filling at 1.56
Your title of Volatile markets would lead one to believe you are trading a volatile asset..
I wouldnt consider DOW a volatile asset and its IV30 is trading apx 27%...
Your wording of Gap down is a bit confusing..When you say gap down 65% of the time,how are you defining gap??? By the ex div amount?? Is that a GAP in your opinion? That would not be a GAP and it is already priced into the options model
Ild like to know how you came up with this 65% gap frequency.
Not sure when you bought your option,but a 3 day weekend typically doesnt bode well for long options ..
And you have zero chance of filling at 1.56