The short answer to your question is, don't be concerned about the liquidity of the option, only concern yourself with the liquidity of the stock. There is always an Arb there ready to do YOUR size on the other side of the trade as long as it can be Arb'd against the stock. Of course, the more options you buy or sell, the more you will cause them to move volatility against you (see: black-scholes option pricing model) and hence the option will become somewhat more expensive or cheaper (depending upon which side you are on). Nonetheless, you can always get as many options done as you need.
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- Thread starter ptunic
- Start date
Thanks for all the help all..
The one major problem with my strategy is that it doesn't work on just 1 stock / currency / commoditiy. It is "out of the market" about 80% of the time, so it only works well if I have a portfolio of at least 30 (preferablly more like 100) different stocks/currencies/commodities/interest rates.
So my main concern is if I ever get to the level of trading large amounts, I'll have to drop off the entire Dow part of the strategy. And without the Dow stocks/options, the strategy will work ok since there are over 30 currencies, etc that are highly liquid. But due to losing 30 or so stocks to trade I'll have much less diversification.. with less diversification I'm forced to reduce the money at risk which in turn reduces return.
-Taric
The one major problem with my strategy is that it doesn't work on just 1 stock / currency / commoditiy. It is "out of the market" about 80% of the time, so it only works well if I have a portfolio of at least 30 (preferablly more like 100) different stocks/currencies/commodities/interest rates.
So my main concern is if I ever get to the level of trading large amounts, I'll have to drop off the entire Dow part of the strategy. And without the Dow stocks/options, the strategy will work ok since there are over 30 currencies, etc that are highly liquid. But due to losing 30 or so stocks to trade I'll have much less diversification.. with less diversification I'm forced to reduce the money at risk which in turn reduces return.
-Taric
Ok-- Neil-- I just saw your 2nd reply-- that makes total sense.
So I'm guessing I won't impact prices too badly as long as the number of shares I control is 3% of the daily dollar volume traded or less. (The 3% number is just a very rough guess on my part).
So in AT&T's case today, volume is about 4.5 million. With a stock price of $20, that means about $90 million was traded today. So... using my 3% number, I'm guessing I could trade $2.7 million in a trade without too much problem.
Or based on the delta-neutral market making in the option markets, I should be able to trade the equivalent.
Makes sense..
Thanks!
-Taric
So I'm guessing I won't impact prices too badly as long as the number of shares I control is 3% of the daily dollar volume traded or less. (The 3% number is just a very rough guess on my part).
So in AT&T's case today, volume is about 4.5 million. With a stock price of $20, that means about $90 million was traded today. So... using my 3% number, I'm guessing I could trade $2.7 million in a trade without too much problem.
Or based on the delta-neutral market making in the option markets, I should be able to trade the equivalent.
Makes sense..
Thanks!
-Taric
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You try to do that many contracts in an illiquid option the vol will explode against you.
Not somewhat more expensive ...
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Hrm-- so even if I'm in a reasonable dollar amount with the underlying stock (again say 3% of the dollar trading volume), if I buy the option I'll still end up moving the market too much if it's volume is low?
One other question for you-- again thanks for all the replies, this is helping me out a lot-- on many of the options I see a bid/ask difference of over 10% or more (and these are even in-the-money options on Dow stocks). Is that typical?
Thanks,
-Taric
You try to do that many contracts in an illiquid option the vol will explode against you.
Not somewhat more expensive ...
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Hrm-- so even if I'm in a reasonable dollar amount with the underlying stock (again say 3% of the dollar trading volume), if I buy the option I'll still end up moving the market too much if it's volume is low?
One other question for you-- again thanks for all the replies, this is helping me out a lot-- on many of the options I see a bid/ask difference of over 10% or more (and these are even in-the-money options on Dow stocks). Is that typical?
Thanks,
-Taric
Typical, yes. Keep in mind that the more in the money the option is, the more it will act like the underlying stock itself, and generally the option markets will be wider than the market on the stock. I've traded on the floor of the CBOE, and depending on what's going on in the underlying it's not uncommon to have 5000-10000 lot trades go up. Keep in my that you're gonna have to pay up, or hit the bid, but it's possible.
Vega
And not to sound rude, but until you have a firm understanding of options trading -- specifically delta neutral and volatility trading, I wouldn't be that concerned with trading such huge size. Once you're able to get a firm grasp of option theory, pricing, risk management, position trading, and execution, you'll be able to answer a lot of your own questions. Just my two cents, and best of luck to ya.
Vega
Vega
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Taric;
[1] Actually that ''8'' on your ''T option '' sounds exactly right;
8 contracts total, just checked it twice & open interest 14k plus.
[2] Vega & Metooxx had a good do more readING point on vol.
[3]Dont take it personaly, here some more vol reading ;
that ''T option'' isnt ITM now & bids are in .9/.95. depending.
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I think ahead also but still read ''Big Trends''
by mr Price Headly ;scale in helps but IF one trades that size , might pay to let several market makers ''work '' that one over time .