Option spread execution

[FSU]

Quote from RedDuke:

FSU,

I just saw some of your earlier posts that SPX was potentially moving to C2 for fully electronic trading. What is the latest on this switch?

Thanks

The compromise by the cboe was to create a new product, spxpm and put that on the c2. There are no plans to move the SPX itself.

 

[RedDuke]

FSU

Once again, thanks a lot.

 

[uptickk]

Quote from FSU:

Yes, much less volume as it just start trading a few weeks ago. Still very tight quotes, so I don't think you would have a problem with fills. I am trading in it today and have been getting filled in between the tight quotes.

The only two vendors that I know of that show the cob are WEX (Wolverine Execution) and ITG. You can see the cob on the CBOE here http://www.cboe.com/cob/cob.aspx and enter an order through any broker. If that broker sends the order to the cob, you will be filled instantly.

For those that care TOS sends orders of 11 or more contracts to actual brokers and everything else to the COB, for SPX.

 

[RedDuke]

FSU,

Curious, what strategies to you trade on SPX?

 

[FSU]

Quote from RedDuke:

FSU,

Curious, what strategies to you trade on SPX?

Can't give my secrets away

But basically I try and put on low risk positions were I think I have an edge. I also trade similar products against each other. I generally trade long premium. Basically you have to find something that works for you. If you plan on simply selling credit spreads every month, you will lose in the long run.

 

[RedDuke]

Quote from FSU:

Can't give my secrets away

But basically I try and put on low risk positions were I think I have an edge. I also trade similar products against each other. I generally trade long premium. Basically you have to find something that works for you. If you plan on simply selling credit spreads every month, you will lose in the long run.

I back tested selling credit spreads on monthly basis blindly back to 1997, and as you said the results were not great. Surprisingly however, with certain risk management, they still yielded positively over that period on average.

Still, not something I want to do for sure.

 

[dragonman]

Quote from FSU:

The SPX is unique in the options world. While other option pits have multiple Market Makers sending quotes, the SPX has only one...

Are you sure the SPX has only one market maker, or the SPX is traded only on one exchange (the CBOE) but may have more than one market maker (such as the market makers that operate in the CBOE)?

 

[dragonman]

Quote from syswizard:

This was very interesting....and points out the difficulty in trading option spreads.
Does the CBOE have the same limitation i.e. spread orders can only be matched against other spread orders ?

No, the CBOE has no such limitation, and also in other US options exchanges such as the ISE your spreads may be executed using implied pricing functionality.

It is very strange to me that the CME/Globex, which is a very sophisitcated electronic exchange, still does not support such functionality.

 

[uptickk]

Quote from dragonman:

Are you sure the SPX has only one market maker, or the SPX is traded only on one exchange (the CBOE) but may have more than one market maker (such as the market makers that operate in the CBOE)?

I cannot confirm the one market maker point (although I have heard this before) but I can confirm that SPX is only traded at the CBOE.

 

[FSU]

Quote from dragonman:

Are you sure the SPX has only one market maker, or the SPX is traded only on one exchange (the CBOE) but may have more than one market maker (such as the market makers that operate in the CBOE)?

The SPX is traded on the CBOE only (along with the CBOE's other proprietary products the OEX and VIX).

There are well over 100 market makers in the SPX pit.

What I said was there is only 1 marketmaker sending quotes at one time. On a rolling basis different market makers (there are several of these designated marketmakers) are allowed to supply all the electronic quotes to the product (this was the case a year or so ago. There was talk of allowing several of this Desiginated MarketMakers to send quotes at one time, but I don't think that is the case).

This is a unique situation in the CBOE floor. In all the other options pit, all the marketmakers send electronic quotes. There is a pit as well for every option traded on the floor, so they can make open outcry trades, but if they want a quote up it must be sent electronically. In the SPX marketmakers cant put up electronic quotes, but their systems can interact with orders that are placed by customers. This is why the quotes are so wide, but the inside quotes are so narrow.

There was huge opposition in the SPX pit into turning it into a fully electronic pit. They argued that their large customers would be better served by this system. They call it BOB (best of both) a little electronic and a little open outcry.