IB sold me put vertical for a large debit that should have been a credit

[FSU]

FSU, I read your post on the first page where you explained that the whole iron condor must execute on only 1 of many exchanges. Which I question as firms pay a lot of money for microwave and now laser communications between exchanges for arbitrage purposes, but for now, let's assume that's what happened. So all 4 legs executed on a single exchange. Fine. What I don't understand is how I was able to sell a 55 LEN call for 2.83...that's not only way outside the best market price, but if I told my broker to sell a 55 LEN call for only 2.83...if my broker was smart, my order would never hit the market...my broker would have been able to lock in about $200 in quick profit with absolutely no risk by instantly writing the call to me and then covering at best market price an instant later. (I assume that there are rules in place to prevent the broker from taking advantage of an order typo by a customer which would require them to send my order to the exchange (any exchange) so that the customer accepts no worse than the ask price.) So because of that, I don't understand how my order could have been traded against other individual orders...it must have been traded, at least partially against at least one other spread. And only because of that was the market maker able to "assign" some strange prices to some of the legs for some unknown purpose.

You are overly concerned with the prices of the individual legs, which are meaningless. When your broker sends your spread to an exchange it will go into its COB, complex order book. This is basically the exchanges mechanism for pricing and executing spreads (as opposed to individual orders). Say your spread has a market of .50-.60 in the COB (the market makers are not making constant markets here, they are simply reacting to your spread as it enters) you sell your spread at .50 and the COB assigns random prices to give you the .50. They won't trade through prices on that exchange but the might on other exchanges.

The individual prices again are meaningless. They just achieved your total price. Think if the prices were in line with all the markets, you and the market maker would have achieved the same result. You still would have sold the spread for .50 and he would have bought it for .50.

All these options traded on the same exchange with the same person. So while he may have sold an option "too high" he also bought one "too high". You can't parse out the individual trades as they were done as a package.

I would also suggest always using limit orders when trading a spread and walking the price up or down until you are filled.

 

[tommcginnis]

You are overly concerned with the prices of the individual legs, which are meaningless. ...
The individual prices again are meaningless. ...
All these options traded on the same exchange with the same person.
I would also suggest always using limit orders when trading a spread and walking the price up or down until you are filled.

With respect, individual leg' prices very much do matter.

The thread earlier covered the fact that if you get whacky prices for individual legs, if (and when!) the time comes to exit or adjust, you are faced having to deal with those whacky-priced legs as individuals (or as verticals), and no longer part of the IC whole. Maybe you are one of those persons who never split an IC?? That's very restrictive, and too often costly, from what I have observed. At any event, dealing with the whole versus dealing with the parts, goes to the heart of the OP.

Second, your statement that, of an IC-whole, the entire thing went to a single exchange and to a single counter-party ignores what a Direct Market Access account accesses, what a DMA broker/platform does, and what happens at the exchange, IF a single exchange happens to have picked up a Smart-Routed order. So.... DMA and Smart Routing. Good things.

 

[tommcginnis]

Never do this unless the spread book is horrible in liquidity or depth which they typically are not. For every time you luck out legging in there will be plenty of times you do not, so avoid the risk/time-sink/etc and just use the spread book.

Ugh, just don't.

Individual legs to a spread: Yeah: *always* a struggle. If you're not in any hurry, not so bad. Or, if "the spread book is horrible in liquidity or depth..." But mostly, just a waste of time. (I love the phrase "time-sink". If you're bored, have fun. If you're busy, Jeez, the crappy spread price will be the best you can do. (FWIW, I have yet to see any real pattern, whether in the underlying, the time of day, bullish or bearish markets, weekday.... nothing. "Just depends" oh who is on the field that day....)

[earnings plays] "Just don't"....... *I* don't. Can't recommend 'em. Watch, on occasion. Mostly ignorant of the whole appeal.... but with all those disqualifications, "Just don't" would be my response, too. (And now, having said that..... maybe I'll just go whip up a paper example for next week. "Hmmmmm, shall I????")

Always have irons in the fire.

 

[ET180]

You are overly concerned with the prices of the individual legs, which are meaningless. When your broker sends your spread to an exchange it will go into its COB, complex order book. This is basically the exchanges mechanism for pricing and executing spreads (as opposed to individual orders). Say your spread has a market of .50-.60 in the COB (the market makers are not making constant markets here, they are simply reacting to your spread as it enters) you sell your spread at .50 and the COB assigns random prices to give you the .50. They won't trade through prices on that exchange but the might on other exchanges.

The individual prices again are meaningless. They just achieved your total price. Think if the prices were in line with all the markets, you and the market maker would have achieved the same result. You still would have sold the spread for .50 and he would have bought it for .50.

All these options traded on the same exchange with the same person. So while he may have sold an option "too high" he also bought one "too high". You can't parse out the individual trades as they were done as a package.

I would also suggest always using limit orders when trading a spread and walking the price up or down until you are filled.

I agree with everything that you said and on my first post admitted that only the total price matters. However, if the market maker is, as you state, "you sell your spread at .50 and the COB assigns random prices to give you the .50"...is that really how it works? If so, if the prices are arbitrary, then why not just assign prices closer to the market value of each leg? Again, this has no consequence to any trading strategy as far as I can tell, I'm just curious about how it all works.

[earnings plays] "Just don't"....... *I* don't.

You might be right...I've been listening to TastyTrade's podcasts while driving and their approach seems to have some logic to it. Sell options during higher IV and buy them back at lower IV. I think it might make more sense to do that on large companies that tend not to move much after earnings. You can still get decent premium further away from the money. Sell iron condors so no matter what happens, one of the wings will be profitable worst-case.

 

[Sig]

You might be right...I've been listening to TastyTrade's podcasts while driving and their approach seems to have some logic to it. Sell options during higher IV and buy them back at lower IV.

That's about as useful a platitude as "buy stocks low and sell high"!

 

[ET180]

That's about as useful a platitude as "buy stocks low and sell high"!

I think it's a little more useful than that...a stock being high or low is relative to some period of time. For example, is SNAP high or low? Hard to say. Prices tend to trend for a lot longer than volatility because volatility is basically bounded while price is not.