Legging Into Vertical Spreads -- Is it Worthwhile?

[dragonman]

Hello, I wonder which execution method can result in better fills regarding vertical spreads (fills below the current mid price) -- placing a vertical spread order or trying to legging into the spreads by trading the individual legs separately?

I would assume that by trying to legging into the spreads there may be more chance to get good fills, since by not being confined that the counter order should also be a spread order there is more order supply available. In addition, there are exchanges that do not enable trading spreads, as opposed to single orders.

However, legging into a spread in order to get good price may take some time and carries a substantial execution risk (such as the market may "run away" and I will be left with only one leg), so I am really not sure if it is worth the effort, especially when the bid/ask spread is relatively small.

I would be happy to read any thoughts and tips in this regard based on your own experience. Thanks!

 

[ForexForex]

1st point: No such thing as "Legging Into Vertical Spreads". Vertical Spreads are the simultaneous purchase and sale of two options.

2nd point: Do you value your time? Or do you prefer to chase the bid/ask around with limit orders hoping to save a nickel at the risk of not getting filled at all?

 

[danshirley]

Lets say I have a stock that has just reported disappointing earnings and the stock begins to drop. I think the disappointment is an abberation, that the stock will recover after a pull back, and I want to establish a bull put spread.

I could immediately buy the long put end of the spread before the stock drops any further (which would raise the price of the long put) and then wait until I see sgns of a bottoming before I sell the short end of the spread... thus maximizing the price I get on the short side.

A less prosaic example (again for a bull put spread) is for a stock where the bid-ask spread on the puts is large, to put a sell order just under the ask and wait for it, and then when you get hit immediately complete the spread by buying the long part at ask. I have done this fairly often and it enhances the premium I collect on my spreads.

You should be aware that some brokers (like OptionsXpress) have strategies that they use to enhance your spread yield. If you leg in you will bypass those strategies and may do worse leg by leg.

e.g.some brokers have an inventory of options that they keep in anticipation of high volatility and they might give you a spread fill better than market out of inventory.

When OptionsXpress does this for me they make a little note on my spread telling me how much money they saved me.

 

[dragonman]

Quote from danshirley:

You should be aware that some brokers (like OptionsXpress) have strategies that they use to enhance your spread yield.

Interesting. Do you have to turn this function on through their platform or it applies automatically when you place any spread order (whether it is a vertical, an iron condor, etc.)? How do they calculate how much they saved you (is it the difference from the current mid price)?

Also, if you are aware of other brokers that do a similar thing please let me know, thanks.

 

[spindr0]

Quote from dragonman:

Hello, I wonder which execution method can result in better fills regarding vertical spreads (fills below the current mid price) -- placing a vertical spread order or trying to legging into the spreads by trading the individual legs separately?

If you have timing and discipline skills, you may do much better by legging in. If you don't, you'll do worse.

 

[spindr0]

Quote from ForexForex:

No such thing as "Legging Into Vertical Spreads". Vertical Spreads are the simultaneous purchase and sale of two options.

I've seen that in many option books! A vertical spread isn't a vertical spread if you leg into it!

What planet are you from?

 

[ForexForex]

Spindr0 .... My posts MUST be kept in the original formatting. Green text, courier font, size 4, bold. That is my new ET branding and it also applies to my quoted posts. Thank you.

 

[babutime]

Quote from ForexForex:

Spindr0 .... My posts MUST be kept in the original formatting. Green text, courier font, size 4, bold. That is my new ET branding and it also applies to my quoted posts. Thank you.

No.

Cry me a river

 

[spindr0]

Quote from ForexForex:

Spindr0 .... My posts MUST be kept in the original formatting. Green text, courier font, size 4, bold. That is my new ET branding and it also applies to my quoted posts. Thank you.

LOLOL...You remiind me of a clown on Yahoo who when called on his nonsensical option posts would go monkeyshit with a claim that a comma was removed from the quote of his post, thereby changing the entire context. As Forrest Gump says, "Stupid is as stupid posts."