Options Trading: Minimizing Friction Costs?

[tommcginnis]

I always use smart routing on Interactive Broker. My default is set to the midpoint between the bid and ask. Usually I send my orders as limit orders at the midpoint. I absolutely HATE trying to save 5 or 10 cents and watching the market slip away from me, then paying 40 cents more. So I take the midpoint and call it a day.

Are you guys saying smart routing on IB isn’t all the smart, and I should be manually trying the different venues? And is coming in at the midpoint particularly weak?

To answer your immediate question: I am not familiar enough -- when I have shopped, I have paid more, but the sample size is quite small -- once a quarter for 5-6 years? So, I saw no reason to change, but based on loose data.

Back to your OP, you'll find a better market on 'fence post' strikes -- the ones that are there from the earliest promulgation of the expiry -- big, round numbers, in 10s and 50s, for example.
(For small example, if you wanted to short the SPX at around 2400, you'd have a harder market than 2395 or 2405. Same with a spread, too -- trying to sell of an "orphan strike" long is a pain, a time-waster, and a dollar-eater.) If you can plan your exits to not be on orphan strikes, but on big ol' fencepost strikes, you'll be a happier camper.

 

[Time4Pizza]

Good point. I do try to generally stick to the big round number stirikes when I can, but haven’t thought about it much. It’s isually just out of habit, but moving forward I will do so keeping that in mind which should help.

 

[ironchef]

Thanks for all the tips guys. I think a 70 delta is about where I land most of the time with my slightly OTM options, and that is good advice to search for options actually being traded and not just MM. Any more tips are always welcome!

I can't find any 70 delta OTM options.

 

[ironchef]

I don’t like to buy options with distant expirations, even though that minimizes theta, because the premiums start to go way up which inherently increases my risk.

I don't think that is true. All things been equal, option price goes up as sqrt(t).

 

[Ilgan]

It is quite normal to see such market downside correction considering the real expectations on the next FED moves. As interest rates are up I am expecting this correction to end somewhere around year-end. Sometimes you need to involve a little bit of fundamentals into trading