It's called a fast market trading condition. Generally when the SP starts moving around very quickly, the quotes just simply can't keep up, so they widen them. Unless it's right after a fed announcement or something, there is no way in hell any MM is going to be able to make a market 5.4-7.8, the broker would rip their head off. Now, for an in the money option a market may be quoted 24-26 or something like that, but even combos are only quoted 2 bucks wide these days. The problem is that everyone wants to just trade this and the OEX electronically and for that luxury your going to deal with a much larger spread. If however you go thru a broker, you'll find that the bid/ask is probably half that of what you see on the screen -- plus you actually have a chance of getting filled .20 on either side of a $1 wide market (although you may have to wait a minute until the market moves against you if you try to go in between the bid or offer. I know it's really easy for everyone to complain about wide spreads and say how great things are other places, but there is a very good reason that the MMs have to have large spreads. It's cuz people try to take advantage of them anytime and anyway they can (remember the SOES bandits). Or once the CBOE started to guarantee certain quantities at the bid or ask, what happened ? Well I'll tell you what happened, you had some a-hole from New York (most of the time, althought their are a-holes everywhere
) put in a one-lot sell order a dime above the bid in the equities, say IBM for example. Let's pretend the market on the screen was 2.00-2.50 (back in the day). This guy would offer 1 lot at 2.10, have his quoted displayed, and then electronically put in an order to buy 200 at 2.10, and essentially get filled .10 above the MMs bid. Tricks like that made/make it very difficult to maintain the tight markets everyone wants, without breaking the MMs that do provide the liquidity that people say ain't there. Trust me, the MMs could care less about selling a 20 lot in between the bid/ask, they'll do that to keep the brokers happy, but they go too tight, and the market starts to move and Morgan Stanley comes in and wants to buy 5000, then there's trouble.Sorry to go off on a rant, but it kills me everyone loves to pick on the MMs for making wide markets (which they have to so their not constantly getting picked off), and when they make a wide market you all bitch cuz you can't pick them off. This isn't even taking into account all the things Morgan and Goldman do to f*ck the MMs, getting picked off for .50 on a 20 lot don't matter to them, losing 1.50 on 100 is a completely different ballgame
Vega
Ex-SPX MM
One final note -- Everyone that trades does so because they feel they have some kind of edge that others obviously don't. For the MMs they trade off of order flow and bid/ask -- this is their edge, and for this edge they will make a two-sided market. You may trade based on technicals or market news moving the market (contrary to popular belief you probably have more access to market news that those on the floor -- they find out about the news generally when Solly comes in to buy 5000 puts:eek: ) You have to decide how your trying to trade. If you're trading straight vol, you're not going to be able to day-trade vol and beat the MMs (unless your riskarb, lol), if you're taking a longer term position, then you have a chance, but if you're trading delta then pay up or hit the bid you cheap bastards
Just kidding, but consider synthetically what price is would be to get long or short an equivalent amount of underlying, and if it's cheaper with options do it, if not -- just trade the underlying outright. If you don't have the funds to get long/short the same amount of deltas in the underlying -- well then you're paying up for the right to over-extend your trading.