You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
My Conclusions
- Thread starter luh3417
- Start date
Quote from scriabinop23:
Why in this modern day are there such ridiculous intervals in the option market? I know why, obviously - it benefits the market makers. I just figure perhaps the client trading community would push for reform in some sense.
Its either that, .5 intervals at cheap stuff, or .10 deep in the money.
It seems so obviously rigged.
The wider bid-ask spread decreases the frequency of quotes. This enhances liquidity since limit order traders are encouraged to leave their order in the book until their quote approaches fair value.
-segv
Quote from segv:
The wider bid-ask spread decreases the frequency of quotes. This enhances liquidity since limit order traders are encouraged to leave their order in the book until their quote approaches fair value.
-segv
So reiterating your point, more open limit orders encourages higher liquidity ... makes sense, especially on lower volume options.
But what about options on stocks that barely move, but have high option trading volumes to offset that liquidity issue, ie CSCO? I imagine if you could trade CSCO options with penny intervals, they'd probably carry more value.
Quote from scriabinop23:
So reiterating your point, more open limit orders encourages higher liquidity ... makes sense, especially on lower volume options.
But what about options on stocks that barely move, but have high option trading volumes to offset that liquidity issue, ie CSCO? I imagine if you could trade CSCO options with penny intervals, they'd probably carry more value.
A smaller spread leaves the market-maker more succeptible to jumps in volatility. In an issue like CSCO with a lot of order flow, the market-maker might be willing to take that risk with a smaller spread, but would also likely reduce the size of the quote. Combine smaller quote sizes with increased frequency (volatility) of quotes, and you have less liquidity overall. Keep in mind also that increased quote volatility is a major scaling issue, and directly translates to increased infrastructure costs.
-segv
Quote from daddy'sboy:
???
That doesn't make any sense. The pricing models make that fairly clear, surely.
For example, what about buying a simple call when iv is low. Then the next day underlying moves up, say 0.5% with no change in iv. You thus make money on your long call. And also, why on earth would you hold a long until expiration when all your extrinsic value has been sucked out of it?
Daddy's boy
your example doesn't explain why trading an option makes more sense than trading the underlying, if your goal is directional only - with the option you pay for time premium and carry vega risk, you don't have these costs if trading the underlying.
Quote from fader:
your example doesn't explain why trading an option makes more sense than trading the underlying, if your goal is directional only - with the option you pay for time premium and carry vega risk, you don't have these costs if trading the underlying.
of course, the allure is leverage. It takes 20x the capital to work with underlying securities compared to options to get the same price movement relative to a shallow in the money call.
so compare margin interest going long to volatility, theta, and rho.
Quote from daddy'sboy:
You're funny!
You can't ignore volatility issues when you sell options and then turn around and look at volatility issues when buying options. Volatility is always an issue.
Daddy's boy
my post was questioning the benefits of buying options solely for directional trading; hence i was ignoring option's volatility as it is not a relevant factor affecting directional trading of the underlying.
Quote from scriabinop23:
of course, the allure is leverage. It takes 20x the capital to work with underlying securities compared to options to get the same price movement relative to a shallow in the money call.
so compare margin interest going long to volatility, theta, and rho.
ok, thanks, that's a good explanation - i'd also add spreads on the underlying vs options to be taken into the cost-benefit consideration; which confirms my sense that the allure of options is more speculative (i.e. leverage) rather than any economic advantage.
also, i was primarily thinking of futures vs options, and for example, for ES the margin is $3k overnight which is at most 1x-3x the cost of an SPX option; hence the advantage of leverage is even less significant.
Quote from fader:
ok, thanks, that's a good explanation - i'd also add spreads on the underlying vs options to be taken into the cost-benefit consideration; which confirms my sense that the allure of options is more speculative (i.e. leverage) rather than any economic advantage.
also, i was primarily thinking of futures vs options, and for example, for ES the margin is $3k overnight which is at most 1x-3x the cost of an SPX option; hence the advantage of leverage is even less significant.
but with buying puts and calls, you lose at most what you put in. With futures, you're downside is potentially much deeper (all the way to 0) (thus requiring stop orders if you don't have the stomach to gamble riding out a drop).
Quote from scriabinop23:
but with buying puts and calls, you lose at most what you put in. With futures, you're downside is potentially much deeper (all the way to 0) (thus requiring stop orders if you don't have the stomach to gamble riding out a drop).
well, you will have to manage risk with trading both futures/stocks and with options; perhaps even more carefully with options given that they typically carry higher leverage - in addition, i think that options are more (cost-)effectively used as a (partial) hedge against a naked position in the underlying, this way you don't have to ride the full time decay and volatility exposure as with an outright options-only directional position...
all the best.