Scalping Equity Options!
- Thread starter bvam1
- Start date
I seem to remember the article as taking advantage of price discrepancies, but they could have been spoofing as the rest of the article looks pretty familiar.
But even with this, I find it a little hard to get weepy for the MMs. There are probably 20 times where they have backed away from buying or selling a single contract (Im not trading 50 contracts of anything) at the posted bid or ask. But it really only takes one broken trade to set you over the edge. Especially when you realize that if you had been wrong, they would never in a million years break the trade.
Hope everyone is ahead of me on taxes.
But even with this, I find it a little hard to get weepy for the MMs. There are probably 20 times where they have backed away from buying or selling a single contract (Im not trading 50 contracts of anything) at the posted bid or ask. But it really only takes one broken trade to set you over the edge. Especially when you realize that if you had been wrong, they would never in a million years break the trade.
Hope everyone is ahead of me on taxes.
<i>An example of such manipulation might work like this: if August 12 calls for options on XYZ Co. were quoted at 10 cents bid/20 cents offered on the PCX, the customer might enter an order to buy one options contract at 19 cents on the PCX, typically also raising the best bid at other exchanges to 19 cents.
The customer then would enter an electronic order to sell 50 contracts, hitting the bid at 19 at another exchange such as the CBOE. That market maker must fill the order at the best bid of 19 cents, making himself long 50 contracts at 19 cents.
After the 50-lot is sold at the inflated price, the market usually reverts to its original 10 bid/20 offered spread. Theoretically, that means the customer made 9 cents or a total of $450 on the trade, since each options contract represents 100 shares of stock and the order involved 50 contracts. And the market maker lost $450 because the best he can do is offset his position at 10 cents in options or an equivalent in a stock hedge.</i>
It sounds a lot more like a flaw of the system. They would do better to modify the system than punish the traders for taking advantage of their flaw, imo.
The customer then would enter an electronic order to sell 50 contracts, hitting the bid at 19 at another exchange such as the CBOE. That market maker must fill the order at the best bid of 19 cents, making himself long 50 contracts at 19 cents.
After the 50-lot is sold at the inflated price, the market usually reverts to its original 10 bid/20 offered spread. Theoretically, that means the customer made 9 cents or a total of $450 on the trade, since each options contract represents 100 shares of stock and the order involved 50 contracts. And the market maker lost $450 because the best he can do is offset his position at 10 cents in options or an equivalent in a stock hedge.</i>
It sounds a lot more like a flaw of the system. They would do better to modify the system than punish the traders for taking advantage of their flaw, imo.
Thug's example was a good one, however there are a few items to consider:
1. If they were long the option they held the time decay risk and had to buy at some point for less than .19.
2. If they went short at .19 then they hold the event risk and have to cover at less than .19. Which I suppose could be accomplished by spoofing the ASK and hitting another exchange.
3. If they can't double spoof and are short then they would still have to cover, which could be accomplished by lifting the bid, but since options trade in nickels, that would cut half the profit. Or they could sit on the bid with everyone else.
If I had a supercomputer I would love to do some of this stuff, but since Im still running a TI99-4A with a 13.3 modem and have to load programs with a cassette recorder, it will be a while till I hit that kind of warp speed.
1. If they were long the option they held the time decay risk and had to buy at some point for less than .19.
2. If they went short at .19 then they hold the event risk and have to cover at less than .19. Which I suppose could be accomplished by spoofing the ASK and hitting another exchange.
3. If they can't double spoof and are short then they would still have to cover, which could be accomplished by lifting the bid, but since options trade in nickels, that would cut half the profit. Or they could sit on the bid with everyone else.
If I had a supercomputer I would love to do some of this stuff, but since Im still running a TI99-4A with a 13.3 modem and have to load programs with a cassette recorder, it will be a while till I hit that kind of warp speed.
The article that you guys are looking for in reference to options mispricing and someone taking advantage of was posted I believe last summer in Barrons. I belive it was posted in the section called strike price or whatever their section on options is. This was a case of two traders from different prop firms who made a lot of money when option on the same stock were priced differently on various option exchanges where in fact the ask on one exchange was priced lower than the bid on another option exchange. I believe the Chicago Board of Options was trying to sue these two traders for taking advantage of the mispricing. I don't know the outcome of the case. I'm sorry I don't know the specific date last summer but it was definitely in Barrons.
I don't know how these traders were even able to enter the .19 orders. Depending on the premium, orders not incremented by a nickel or quarter are simply not executed. As an example, whenever I end up with some otherwise worthless OTM contracts where the bid is blank and the ask is .25 and I try to enter an order (using IB's TWS) to sell for .2 or less I get an error message stating the order is outside the pricing parameters for the contract and will not be entered ( let alone executed).