S & P 500 Options - Why the Narrow Spreads?

A

arizonadreamer

Hello Folks:

I've noticed over the recent weeks that the spreads on the SPX options have narrowed considerably.

For example. an option that in the past might be going for 22.5 x 24.1 (mid=23.3) is now going for 22.9 x 23.7. In other words, what used to be a 1.60 spread is now a .80 spread. Other prices reflect similar narrowing trends. It is not always .80; it could be .60, 1.00, or 1.1 and so on.

Don't get me wrong, I'm not complaining, but I sure would be interested in learning why in this volatile environment, spreads have narrowed! Was there some type of methodological change (electronic trading) that accounts for this?

All thoughts are welcome.

AZD
 
Quote from arizonadreamer:

Hello Folks:

I've noticed over the recent weeks that the spreads on the SPX options have narrowed considerably.


AZD
More...

Hello Arizona,

Most likely reason is that the markets are less volatile than they were last autumn - when spreads were beyond absurd.

Mark
 
1) When a market is trading at "lower" prices, you don't have to keep an eye on as many strike prices. The volume gets concentrated into fewer strike prices creating more competition to clamp down the bid-ask spread.
2) A lot of "hot money" has been washed out of the market which can contribute to lower volatility thereby reducing bid-ask spreads. :)
 
Hey Everyone:

I stepped away for a moment - thanks for the replies.

Let me address them one by one

1) Hello Arizona,

Most likely reason is that the markets are less volatile than they were last autumn - when spreads were beyond absurd.

Mark


Hi Mark, how are your condors doing? Yes, spreads were INSANE for a while. 3, 4, 6+ points. But now, the spreads are narrower than even the catatonic times of a few years back. They were never this low.

2) Spreads widened while the shorting ban was in effect. It's taken some time for the markets to normalize from that shock.


Again, they are even narrower . . .

3) Back in Sep-Nov 08 was a volatile environment. Now, it's pretty manageable.

Yes, but again, why so narrow?

4) 1) When a market is trading at "lower" prices, you don't have to keep an eye on as many strike prices. The volume gets concentrated into fewer strike prices creating more competition to clamp down the bid-ask spread.
2) A lot of "hot money" has been washed out of the market which can contribute to lower volatility thereby reducing bid-ask spreads.


That makes sense to a degree. If so, why were the spreads not narrowed as the SPX went from 1500 to 1100, or 1000, 900 etc.?

5) New rules for SPX at CBOE.

This is what I was thinking. Is this your guess or do you have specific information (a link) to learn more about these new rules?

--------------------------

Thanks everyone.

AZD
 
Quote from arizonadreamer:
That makes sense to a degree. If so, why were the spreads not narrowed as the SPX went from 1500 to 1100, or 1000, 900 etc.?
More...
The "hot money" hadn't capitulated yet. :)
 
Quote from MTE:

Back in Sep-Nov 08 was a volatile environment. Now, it's pretty manageable.
More...

VIX @ 50 is pretty manageable, eh? I'd say this is a pretty volatile environment we're in now. Sept-Nov was extreme
 
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