How to trade multi-leg options? - Price discovery, execution, leg risk, etc.

A

Alex123

Dear fellow trades,

I am looking for some know-how on trading multi-leg options and would greatly appreciate any advice and pointers you would be willing to share on this. I am interested in all details: discovering market price, execution, leg risks, regulatory constraints, brokers, direct market access, etc.

To get the ball rolling, let me start with the price discovery issue. As far as I can tell, please correct me if I am wrong, multi-leg options are not actually listed on exchanges and have to be constructed using vanilla puts and calls. The price obtained using the spread of the underlying legs, the implied price, is often absurd, for example butterflies have implied prices with negative bids and positive offers. So, surely, none in their right mind trades at the implied spreads. What are, then, the prices?

Second issue is the execution. If the multi-leg options are not listed as a single instrument, how does one go about the execution? Can you submit an order to an exchange for a multi-leg option as one trade and have a guarantee that all legs get filled? What are the options and best practice here?

Another issue is regulatory. Apparently, there is a regulation in the US that one cannot place limit orders in one type of option simultaneously on bid and offer. Is this really the case? Are the types of account that allow one to do that?

These are just a few questions to get the thread started. However, any advice and experiences trading multi-leg options not directly related to these questions would also be greatly appreciated.

Many thanks
 
The CBOE and ISE both have a complex order book. You will need a platform that allows you to enter your orders into the complex order book, usually up to 4 legs. A marker maker either on or off floor, or another customer, will do the other side of your trade if it works for them. You can't get legged and miss part of the spread. You either do it or your order will sits on the "book" until you cancel it.

There is no regulatory issue here. Your not making two sided markets in the same option, your doing a spread.

If you have the profile to use an introducing broker like myself, I can offer access to floor brokers that can "shop" your order to their other clients. We offer Institutional Customer Portfolio Margin accounts to professional traders.
 
rmorse,

Thank you for reading and replying to my post. I would be grateful if you could clarify some of your statements and if possible provide some further information.

“You will need a platform that allows you to enter your orders into the complex order book…”
What are these platforms?

“There is no regulatory issue here. Your not making two sided markets in the same option, your doing a spread.”
I appreciate that there is no regulatory issue here, however if I were to place two different orders in a multi-leg option, say two butterflies, such that a leg from one butterfly was on the bid and a leg from another butterfly was on the offer at the same strike – is there an issue here? Are there types of account that are not subject to these constrains?

“If you have the profile to use an introducing broker like myself…”
What is this profile?

“We offer Institutional Customer Portfolio Margin accounts to professional traders.”
Please elaborate on “We”, “Institutional Customer Portfolio Margin” and “professional traders”

Many thanks
 
Quote from Alex123:

I appreciate that there is no regulatory issue here, however if I were to place two different orders in a multi-leg option, say two butterflies, such that a leg from one butterfly was on the bid and a leg from another butterfly was on the offer at the same strike – is there an issue here?
More...
If synthetic equivalents exist, you can avoid this.

Re your first post, if the multi-leg position doesn't exist as a single order, look for a combination of the largest existing combos that achieve it. For example, a broken iron condor could be placed as two strangle orders or placed as two verticals. It's still a leg in (two positions). The reason for putting up all entry possibilities is because sometimes, better bids/asks come in on a different component.
 
spindr0,

Thank you for the synthetic tip and for reading and replying to my post. I would be grateful if you could clarify some of your statements and if possible provide some further information.

“…if the multi-leg position doesn't exist as a single order…”
I have looked at the sites of several option exchanges and have not been able to find any listed combos. Perhaps I was looking in the wrong places and I would be grateful if you could point out where I could find details of what combos are traded as single orders on which exchanges.

Many thanks
 
Quote from Alex123:

rmorse,

Thank you for reading and replying to my post. I would be grateful if you could clarify some of your statements and if possible provide some further information.

“You will need a platform that allows you to enter your orders into the complex order book…”
What are these platforms?
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We offer Sterling Pro, Knight Direct, Silexx Obsidian and Instinet's Trade Speed as four examples. Then we connect these platforms to a Direct Market Access (DMA) "pipe" to the exchanges which allows our clients to direct their order to any exchange. Each one of these platforms has also written a order entry ticket compatible with the complex order books on the CBOE and ISE. So, you can direct your orders there.
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“There is no regulatory issue here. Your not making two sided markets in the same option, your doing a spread.”
I appreciate that there is no regulatory issue here, however if I were to place two different orders in a multi-leg option, say two butterflies, such that a leg from one butterfly was on the bid and a leg from another butterfly was on the offer at the same strike – is there an issue here? Are there types of account that are not subject to these constrains?
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These orders reside in the complex order book, not on the individual option markets. To my knowledge, it's not an issue, but I could be incorrect. If it were an issue and you did not mind paying the higher rates, you could be designated "professional customer." Customers can not make two side option markets, but on most exchanges, professional customers can. A customer on the CBOE with most equity options pays $0.00 execution fee, a pro-customer would be charged $0.20 per contract.
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“If you have the profile to use an introducing broker like myself…”
What is this profile?
-------------
I will PM you
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“We offer Institutional Customer Portfolio Margin accounts to professional traders.”
Please elaborate on “We”, “Institutional Customer Portfolio Margin” and “professional traders”
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We=Victor Securities

Institutional=LLC or S corp, not individuals

professional traders=Full time traders, they tend to trade more volume and care about service and other ways we can add value, rather than the lowest price.

Many thanks
More...
 
Quote from Alex123:

I have looked at the sites of several option exchanges and have not been able to find any listed combos. Perhaps I was looking in the wrong places and I would be grateful if you could point out where I could find details of what combos are traded as single orders on which exchanges.
More...
I would assume that all of the exchanges support the same combos but that's no more than speculation.

Each broker has a menu of combo orders that it offers and that's the limiting factor. Some offer more, some less.
 
Quote from spindr0:

Each broker has a menu of combo orders that it offers and that's the limiting factor. Some offer more, some less.
More...

But do they offer only those combos that are supported on an exchange? And how are they able to provide a guarantee that all legs will be executed (like, say, IB does for some combos)?
 
Quote from Alex123:

But do they offer only those combos that are supported on an exchange? And how are they able to provide a guarantee that all legs will be executed (like, say, IB does for some combos)?
More...

The spreads are ONLY represented as a spread, not limit orders on the individual options.
 
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