Scalping Equity Options!

Babak,

I'll try my best to answer your question, but I'll stick mainly with the rules imposed by the exchanges.
It might helps if you check out the 'institutions and rules' link at www.amex.com (at the bottom of the page)

Whatever ideas you get from these rules will be up to you, because I will not point it out clearly to you.

First of all, you can't trade a crossed market. For example, exchange A's bid/ask is 4/4.5 and exchange B's b/a is 4.5/4.8, or 4.6/4.8. The auto-ex. system will not allow you do to this and your orders will be sent to the specialists who will definitely not execute your orders. Basically, you can't buy or sell at the price inferior to the best bid or offer.

Second, if you placed an order which put you as the first person with the best bid or offer, the exchange has to execute your order should people buy or sell at the best bid or offer. For example, if my offer to buy is 4.5 which increase the best bid from 4.4 to 4.5. A person sell at the best bid of 4.5, the exchange has to execute my trade because I have the best bid.

Third, the exchanges imposed a rule that you can't place simultaneous trades in the same option series. That's why they imposed the 15 sec. requirements between each trade in the same option series. This is to prevent previous successful scalping operations.

Fourth, and most importantly, are the rules on the exchanges' auto-ex. system. If buy place a trade to buy/sell at the best bid/offer, then your order will be automatically executed, assuming that you meet the limit contract size per trade (Depending on the liquidity of the options, but I think it's around 50 contracts max. For the QQQ, I think they increased it to 100 max.) Say, if the best b/a is 4/4.2, you place an order to buy at 4.2 or sell at 4, then your order will be automatically executed. If someone increased the best bid from 4 to 4.1 by entering an order to buy 10 contracts at 4.1, then other people now can sell at the best bid of 4.1 using the auto-ex. system for up to 50 contracts (or whatever the max. allowable size is).
 
Bvam,

I hope you can find a way to make money and I don't want to discourage you. But if you read my prior post especially the part about a bazillion (lots more than a million billion) contracts on the bid/ask, you are not stepping in front of anyone (scalping) you are sitting in a queue waiting for someone to hit you. The spread is as thin as a dime or a nickel on many Q contracts.

Now lets say you are trying to scalp a less liquid contract. What I have found and I am just selling not scalping. If the contract is bid 1 asked 1.40, I will put in a limit to sell 1.25. More times than not my 1.25 order will get filled and then the mm will print a sale at 1.40. Now the market is back to 1 X 1.4.

Finally, there was an article about a year ago probably in the WSJ of some guys that set up an ARB program that worked against the difference in prices on option exchanges. Seems to me that the MMs complained and WON a case that shut down this system.

All in all, I wish you luck, just a few things to think about.
 
trdrmac,

I appreciate your comment. Obviously, you have an extensive knowledge about the issue.

Yes, I have considered those questions, as suggested by you, earlier.

First of all, I will not scalp in illiquid options. Second, I will make sure that I will be the first on the best bid or offer queue. This means that I have to do some searching for the right options to scalp. I am ready to admit that people can't scalp every single option out there. Scalpers have to look for opportunities to scalp, and these opportunities present themselves in particular options at a particular time.
 
Well, I wish you the best, if for no other reason when my book is published I want to include a chapter called Option Market Makers are Crooks. But don't look for it anytime soon, need to be bankrupt before I start doling out advice.

It used to be that Bloomberg.com had a most active options section and Yahoo finance has a free options screener.

Regards,
 
That's a really interesting point, yes I agree, Options Market Makers are crooks. They are ripping people off of the huge spread. But you know what, in my process of scalping for myself, I help out the general public too by giving them a better price to buy or sell at. If I am successful in scalping then, good for me. If not, well at least I know that I am helping others get a better deal from the MMs. Thanks to scalpers, the market would be more efficient than otherwise.

Hm, I am wondering why all the options buyers and sellers out there don't hire me as their employee? I can give them a better deal on their trades by messing with the MMs! Haha!
 
Originally posted by GATrader
Some firms also will charge for fees for excessive cancelled orders and other little rules intended to make surrogate off floor market making harder. But you can certainly scalp options wherein you buy a put in the AM and sell it 10 minutes later to take loss or hopefully profit from stock movement.
More...
Sure, and I do that, well just a little. I am not an expert of options at all. my only use of them is to hedge. My style is off floor market maker, that's why when looking at options I did not find it interesting. also the agreement to trade options with IB is very strict. I don't think it's smart to challenge it (I still remember my test with odd lots.. that's when I realised they DO check :) ).
Anyway we have a different definition of scalping. Of course I can buy and sell a few minutes later (specially if the order is hitting the ask, so no question I am not chasing the elusive spread). I can do that several times a day even I guess. but that's not really scalping, it's intraday swing or range trading. and that's fine (I guess, no expert again). However I use them to hedge not actual trading.

tntneo
 
Originally posted by trdrmac
Bvam,

I hope you can find a way to make money and I don't want to discourage you. But if you read my prior post especially the part about a bazillion (lots more than a million billion) contracts on the bid/ask, you are not stepping in front of anyone (scalping) you are sitting in a queue waiting for someone to hit you. The spread is as thin as a dime or a nickel on many Q contracts.

Now lets say you are trying to scalp a less liquid contract. What I have found and I am just selling not scalping. If the contract is bid 1 asked 1.40, I will put in a limit to sell 1.25. More times than not my 1.25 order will get filled and then the mm will print a sale at 1.40. Now the market is back to 1 X 1.4.

Finally, there was an article about a year ago probably in the WSJ of some guys that set up an ARB program that worked against the difference in prices on option exchanges. Seems to me that the MMs complained and WON a case that shut down this system.

All in all, I wish you luck, just a few things to think about.
More...

Can you find that article, I would very much like to see it?

Thanks
 
I checked earlier on WSJ.com, but that only goes back about 30 days. They do have a premium search that goes back a little further. I am fairly certain WSJ published the article, but I also get Barrons which would be my next guess followed by IBD.

If I get caught up on my taxes I will do a little poking on line and if I can find something I will post you a link. You may also want to poke around as I think this had something to do with the new MM rules for options. So there may be some related links.

As an aside I found the article upsetting since Arbitrage is one of the few things that keep markets fair and efficient. But greed is greed I suppose.

Have a good weekend.
 
Originally posted by trdrmac
I checked earlier on WSJ.com, but that only goes back about 30 days. They do have a premium search that goes back a little further. I am fairly certain WSJ published the article, but I also get Barrons which would be my next guess followed by IBD.

If I get caught up on my taxes I will do a little poking on line and if I can find something I will post you a link. You may also want to poke around as I think this had something to do with the new MM rules for options. So there may be some related links.

As an aside I found the article upsetting since Arbitrage is one of the few things that keep markets fair and efficient. But greed is greed I suppose.

Have a good weekend.
More...

I did a search on all of that and could not find it. If you do I would appreciate it.
 
metooxx,

I think I can find an article on that, but I am not sure it's the same one though. But I think you'll find the article interesting. The link is at Yahoo option forum, I hope it's still still. I'll check it and poist it here later for you. It's a very interesting concept in which scalpers make big bucks from the MMs.
 
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