Let's talk about spread execution

H

hlpsg

Anyone who has traded for any amount of time knows the feeling. You put on a credit spread order, then you sit and wait. You watch the mid price for the spread go as high as 25 cents above your asking price, and still you're not filled. Your order just sits there.

You cave in and carve 5 cents out of your asking price. You resubmit the order. Still you're not filled. After a couple hours, you cave in some more and carve another 5 cents. You're still not filled.

And that's the easy part - putting the trade on.

When you need to get out in a hurry, the same thing happens. Only now the stress is much worse. And we're talking about trading a liquid instrument with high volume.

I have to admit this is the part of options trading that I hate most. Getting a bad price on trade entry means you're down from the start, and I think no one likes that.

I'd like to know how you execute spreads. Is there an automated safe way to get filled on spreads by legging into the individual legs without too much risk? The assumption is that it's easier to get filled on mid on individual legs than it is to get filled at mid for spreads.

I don't like to do this manually because it gives me heartburn as you have to juggle with all the mental math in your head trying to figure out the prices, but I'm thinking if there is a way to do this automatically either by special orders or by a software that does it for you.
 
Quote from hlpsg:

Anyone who has traded for any amount of time knows the feeling. You put on a credit spread order, then you sit and wait. You watch the mid price for the spread go as high as 25 cents above your asking price, and still you're not filled. Your order just sits there.

You cave in and carve 5 cents out of your asking price. You resubmit the order. Still you're not filled. After a couple hours, you cave in some more and carve another 5 cents. You're still not filled.

And that's the easy part - putting the trade on.

When you need to get out in a hurry, the same thing happens. Only now the stress is much worse. And we're talking about trading a liquid instrument with high volume.

I have to admit this is the part of options trading that I hate most. Getting a bad price on trade entry means you're down from the start, and I think no one likes that.

I'd like to know how you execute spreads. Is there an automated safe way to get filled on spreads by legging into the individual legs without too much risk? The assumption is that it's easier to get filled on mid on individual legs than it is to get filled at mid for spreads.

I don't like to do this manually because it gives me heartburn, but I'm thinking if there is a way to do this automatically either by special orders or by a software that does it for you.
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What broker are you using and what product are you trading?
 
Quote from FSU:

What broker are you using and what product are you trading?
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I would have to ask the same question...

Never had that problem.

Three days ago did a credit spread on low volume, wide bid - ask spread and put it in to dink the floor for 5 cents on eack side and got filled before I clicked the order status...at 2 cents better then my limit.
 
I've used both TOS and IB in the past. Used to trade RUT, but now moving to /ES.

Which brokers are you guys at, and what instruments do you trade?
 
Quote from hlpsg:

I've used both TOS and IB in the past. Used to trade RUT, but now moving to /ES.

Which brokers are you guys at, and what instruments do you trade?
More...

The reason I ask is each broker has different criteria for different products on how to handle a spread trade. For example certain brokers may send all spreads under 10 in the SPX to the COB (complex order book). This might get a better or faster fill then if is sent directly to their floor broker.
 
You're trading options with wide spreads. So as an example, let say one market is 9.00/10.00, and the other leg is 13.00/14.50. The mid point is 9.50 - 13.75=4.25. Let's assume this is fair value. Let's also assume you want to sell 10 spreads at 4.25. Now a customer bid comes into one leg and that market is now 13.50/14.50. Now the mid point of the spread is 9.50-14.00=4.50 and your offering at 4.25. No trader is going to change their values and buy your spread just because a fresh bid came in. If you quote the market in the trading crowd, you might get 4.10/4.40 1000 x 1000 even with the market change.

I hope this helps. I know a lot of traders like trading these products because of the lower commissions and tax treatment, but many would have net profits better with SPY and IWM because of the tight liquid markets.

Bob
-----------------------------------
Robert L. Morse
Business Development
VICTOR SECURITIES
285 Grand Avenue,Englewood, NJ 07631
rmorse@victorsecurities.com
office: 646-545-3860
http://www.linkedin.com/pub/robert-morse/6/8a7/617
http://www.victorsecurities.com/
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Quote from hlpsg:

I've used both TOS and IB in the past. Used to trade RUT, but now moving to /ES.

Which brokers are you guys at, and what instruments do you trade?
More...

for tos, just go to the widget 360 tool and select 'implied volatility' and the month of options you want to trade. check the strikes you want to use and see if there is a distortion along the curve, this will give you the answer you are looking for as to why you credit spread is having difficulty filling. you should know if you don't check this and you enter an order that may be skewed against you, your order will be filled immediately. so be sure to check first, so you don't start the trade in the red.
 
Quote from stoic:

I would have to ask the same question...

Never had that problem.

Three days ago did a credit spread on low volume, wide bid - ask spread and put it in to dink the floor for 5 cents on eack side and got filled before I clicked the order status...at 2 cents better then my limit.
More...


Done @ SCHW. I mostly trade equities.
 
I have an idea concerning execution but I'm not sure if it's workable though. Would like your thoughts on this. I've never done anything like this so I really don't know what the feasibility is for someone trading retail.

IB allows you to place an order that is one tick better than whatever the current bid-ask is. I think this is how it works.

Say the bid-ask is 1.00 - 1.30, you place this order to buy, it'll be placed at 1.05. If you place an order to sell it'll be placed at 1.25. I assume IB will continually modify the price according to the current best bid-ask.

So this is my idea to get a good price on a spread. It has to be done using some method to automate the process, don't think it should be done manually. Say I want to sell a call spread, selling the 800 strike, buying the 810 strike.

First I put in the buy order for the 810 strike, for the sake of margin requirements. So using the special order that IB provides, it gets submitted at 1.05, hoping to hit someone's market order or someone willing to trade at that price. Once this order gets filled, I setup the order to immediately trigger another order to go short the underlying to even out my deltas to keep me delta neutral till my other order gets filled.

Now I place the order to sell the 800 strike. I do one tick better than the current ask price. Once this order gets filled, I buy back my shorts.

I will probably get a good fill for my spread, but I did some calculations with /ES, and to balance out my deltas, I had to trade quite a lot of futures, and the slippage in the futures plus the futures commissions would probably more than wipe out whatever gains I got from trading the spreads this way.

Any ideas or comments?
 
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