options - open interest volume and pricing impact

[Abundance Magnet]

i hear ya... MM and their games. I track the b-a of holdings via snapshots so that I can get a better sense of fair value.

anybody know of a software that shows/graphs the historic bid-asks for an option?

 

[Abundance Magnet]

SLE said it better than I could, as usual. In addition, there is only so much you can learn in books about derivatives. Practical experiance is a better learning tool after you get the basics.

25 years ago, most MM were locals. Around 2003 that started to change with multiple listing and automation. Today, most local MM like me are gone. Today, they all work for medium to large size firms. The larger MM are almost all automated and many use a global dispersion strategy. They not only monitor single stock risk but their portfolio risk. They would prefer to trade a lot of options on many strikes, both long and short on many related symbols that are correlated or vs a correlated index.

My view, as I traded, and the view of a retail trader is just not the way they look at the market. They could care less about a 100 lot 1 second after the trade, unless it was follow up with many similar orders which will move their values. It is not done manually at most firms.

thanks for the insight!

For things like SPY i've noticed that sometimes I get a mid-fill or sometimes better (slightly closer to bid). other times, it's mid plus (closer to the ask). That was the case today... any reason why there is that discrepancy? I trade small lots...

 

[Robert Morse]

anybody know of a software that shows/graphs the historic bid-asks for an option?

LVX-Not sure if this is last sale, bid or ask or mid-point.

 

[Robert Morse]

thanks for the insight!

For things like SPY i've noticed that sometimes I get a mid-fill or sometimes better (slightly closer to bid). other times, it's mid plus (closer to the ask). That was the case today... any reason why there is that discrepancy? I trade small lots...

The midpoint is not always "fair value" to a market maker and each market maker has their own skew. And, you might have caught a customer order. This is why all option orders need to be "worked" to find liquidity up to your limit. You need a process to find your limit but be mindful that the midpoint can move without any change in real value for the options at all with small customer orders. That does not mean the options is worth more or less because one side got tighter. Just the midpoint moved.

 

[jeffalvinson]

The accuracy of a programmed option trading system is based on the precision of the options traded.
For myself, January 2, 2019 will be 21 years of option trading, testing, developing, and programming on the OEX, QQQ, IWM, DIA, & SPY options.

Here is what I learned and its my Holiday present to anyone willing to listen (you will probably hate it):
1: Only trade the SPY options in the 1.50 to 3.00 price range (average 2.25),
2: that expire on the 3rd Friday of the each month.
3: If the trade is directional, close the trade no later than the Friday before expiration Friday.
4: On the Monday of expiration week, open new trades with the 2nd month options expiring on the 3rd Friday of the next month.
5: Look for options that have a daily volume of at least 8,000 or greater.
This creates a bid/ask spread of .01 to .03 (average .02) during market hours.

The SPY options with the above parameters are far superior to anything else.
The Open Interest isn't meaningful compared to the importance of the Daily Volume of an option.
With SPY options, volume is King! High Volume = Super Low .01 to .03 bid to ask spreads
in the price range mentioned above.

For directional trading, Delta isn't as important as the proper price range of the SPY options,
which normally create roughly a +30% profit with an accompanying 20 point move in the SPX.

 

[Overnight]

...Today, most local MM like me are gone...

Right there is more evidence that you truly are OMM (Old Man Morse). Crusty, in for the long-haul.

(I've been trying for quite a while now to find a certain clip from the old Max Headroom TV show which shows your exact pose in your avatar pic. If I ever find it, it will be funny. Because you look just like Max as compared to that pic.) Teehee.

 

[ironchef]

Delta is hedged with the underlying (or futures) as you say. However, sooner or later the book will be leaning too much in the convexity Greeks - like too long gamma, long vega etc. The MM would usually hedge that by skewing his markets towards the risk he wants to cover. An overly large position in a single option can be an actual problem should you get pinned on expiration, so they usually to spread that risk around.

SLE said it better than I could, as usual. In addition, there is only so much you can learn in books about derivatives. Practical experiance is a better learning tool after you get the basics.

25 years ago, most MM were locals. Around 2003 that started to change with multiple listing and automation. Today, most local MM like me are gone. Today, they all work for medium to large size firms. The larger MM are almost all automated and many use a global dispersion strategy. They not only monitor single stock risk but their portfolio risk. They would prefer to trade a lot of options on many strikes, both long and short on many related symbols that are correlated or vs a correlated index.

My view, as I traded, and the view of a retail trader is just not the way they look at the market. They could care less about a 100 lot 1 second after the trade, unless it was follow up with many similar orders which will move their values. It is not done manually at most firms.

Thanks.

Another question, how do they make money if they hedge their position with delta, futures and other options? Are they mainly feeding on bid/ask spreads and commissions?

 

[Robert Morse]

anybody know of a software that shows/graphs the historic bid-asks for an option?

And Realtick:

 

[ironchef]

It's the roach motel joke.

Not a joke!

I could not give away my long GE OTM calls. I called broker and asked if I could sell them for $0.0 so I could take tax losses this year and the answer was a resounding NO, not allowed by exchange rules.

 

[ETJ]

Actually it's called a cabinet trade and although not common is allowed. Especially in a multilist like GE. Next time have your broker try another exchange.

https://www.investopedia.com/study-...rket-place/cabinet-trade-accommodation-trade/