Question on Liquidity of Option strategy trades

T

traderwald

Hi guys,

I have some questions about the liquidity of the options trades and the impact of this on the Risk on the trade.

1. What is the risk of issue with liquidity on a vertical spread that has been opened ? Is there any issue if the short cannot be closed due to liquidity if it goes ITM ? (Also, will there be liquidity issue for ITM options when the underlying is a top stock / ETF or ES/CL )

2. Is it ok to not use the strategy builder to do a vertical spread and do it manually ? (for example, first enter the long call, then enter the short call. When closing first close the short call and then close the long call).

Is this ok in general to create a vertical spread manually ? or is there any advantage to do using strategy builder that is in the platform

And specifically, is there any liquidity related issue with manually created vertical spread as compared to the one created using strategy builder ?

Thank you
 
two remarks: what you see as actually being traded is not the available liquidity it's (like open intrest) just a hint. Market makers are prepared to offer you quite high liquidity. And yes it's best to trade the two legs at once since the combo represents lesser risk for the market makers so they should provide you with better pricing for the combo. Best way to get fills on a combo is take both mid prices as a proxy for theoretical prices and than let the market maker take some money on that (pennies). The more the actual liquidity in options the better this will work.
 
etrades said:
1. What is the risk of issue with liquidity on a vertical spread that has been opened ? Is there any issue if the short cannot be closed due to liquidity if it goes ITM ? (Also, will there be liquidity issue for ITM options when the underlying is a top stock / ETF or ES/CL )
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Yes: liquidity will drop much quicker ITM than OTM as you move away from MKT. This may or may not be seen in volume-per-strike, but you will see the bid-ask spreads go wider by 4x-5x or more. Ugly.

etrades said:
2. Is it ok to not use the strategy builder to do a vertical spread and do it manually ? (for example, first enter the long call, then enter the short call. When closing first close the short call and then close the long call).
More...

Again: there are 3-4-5 ways of entering orders in TWS. If you do not learn them all, you will be killed.
As far as exiting short spreads, it depends on when you are exiting: how much time, and how much market premium, is left? It is generally better to exit as a spread, but if it's 24 hours to expiration, and there's a pittance left in your long, then consider leaving it the hell alone: as a lottery ticket, should the market spike in that strike's direction. It's a fun little game, played at leisure.

In all of this, "Things can vary." You need to go in, play around, and see what the market will take/not take. AND THEN you need to realize that this may not hold for next Spring, or next week,..... or tomorrow.
 
Hi guys,
tommcginnis said:
Yes: liquidity will drop much quicker ITM than OTM as you move away from MKT. This may or may not be seen in volume-per-strike, but you will see the bid-ask spreads go wider by 4x-5x or more. Ugly.



Again: there are 3-4-5 ways of entering orders in TWS. If you do not learn them all, you will be killed.
As far as exiting short spreads, it depends on when you are exiting: how much time, and how much market premium, is left? It is generally better to exit as a spread, but if it's 24 hours to expiration, and there's a pittance left in your long, then consider leaving it the hell alone: as a lottery ticket, should the market spike in that strike's direction. It's a fun little game, played at leisure.

In all of this, "Things can vary." You need to go in, play around, and see what the market will take/not take. AND THEN you need to realize that this may not hold for next Spring, or next week,..... or tomorrow.
More...


"Yes: liquidity will drop much quicker ITM than OTM as you move away from MKT. "

Do you mean the other way i.e. liquidity will drop quicker OTM than ITM ?


If I build a strategy manually - i.e. do not submit it as a combination order, is that ok ? Will it still be considered a combo in terms the risk and profit profile ?
 
Read my comments again: you obviously don't understand what I am saying.
the risk and profit profile will be the samen but you willl get worse execution most likely
 
cvds16 said:
Read my comments again: you obviously don't understand what I am saying.
the risk and profit profile will be the same but you willl get worse execution most likely
More...


What I mean is will it be considered the same by the broker ? In terms of providing similar margin for the short call as they would do in a combo ? Or will it be risk and profit profile of individual short call and margin that they provide ?
 
you still don't get it ... if you leg in you shoudl always do the long part first but why would you do that if the combo is quick and almost guaranteed to have a better price ... to answer your question they will always look at the combo for margin even when you are so pigheaded to do them in two legs seperatedly ...
 
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