I'm curious as to how to get good straddle fills on futures options, and my experience thus far with equities and ETFs leads me to believe that legging into synthetics can often be preferable to limit orders. I was hoping to get some input or advice on whether a similar situation might exist for open outcry futures options.
My derivatives trading experience thus far has been almost exclusively with equity options, as well as a limited amount with electronically traded futures/options. I mainly put on non-directional volatility trades around events such as earnings, FOMC meetings, etc. - usually initiating the trade with a straddle or synthetic straddle and then hedging via positive or negative gamma scalping, although the hedging interval can be much wider than what a lot of people would probably consider gamma scalping.
Since getting a PM account, Iââ¬â¢ve been leaning toward synthetic straddles, as they seem to result in the best fills. I really like IBââ¬â¢s ââ¬Ëvolââ¬â¢ order with dynamic updating and automatic delta hedging, which basically does this:
ââ¬ÅVolatility order ââ¬Â¦allows you to trade volatility instead of price. TWS calculates the limit price of an option as the function of the option's implied volatility. You specify the option volatility, and TWS calculates the limit price for you. ââ¬Â¦ the bid and ask values are displayed as volatility instead of price. You can also enable dynamic management of these volatility orders, where TWS updates the limit price based on movement in the underlying price, cancels the order if the underlying price moves outside a high or low price range, and transmits a delta trade for the underlying when the volatility order executes or partially executes.ââ¬Â
(from http://individuals.interactivebrokers.com/en/trading/orders/vol.php?ib_entity=llc)
I'd like to do a similar type of trading, although less event based, with futures options in the following markets:
Cocoa
Coffee
Corn
Cotton
Crude Oil
Gold
Live Cattle
Silver
Soybeans
Sugar
Swiss Franc or Euro FX
T-Bonds (or maybe 10 yr T-Note)
Wheat
Yen
Of these, the currencies, and possibly bonds, seem to have active electronic markets which I can trade with IB, but the rest are outcry. Grain options just started trading alongside the pit during day, but Iââ¬â¢m not sure if the spreads will become attractive.
Ideally, I want to be able to write straddles that are within 1% of the mark. I'm normally not in a rush, as my tentative time frame is 8 weeks on avg, so I don't mind waiting several hours for a good fill if necessary. In an ideal world I'd give the broker a volatility order as described above, such as:
ââ¬ÅSell 2 (4/6/8 etc) ATM puts or calls for at least X% volatility, then immediately hedge with 1 (2/3/4 etc) futures contracts at the market.ââ¬Â
Somehow, I find it highly doubtful this will be possible, so the next best thing would be something like:
ââ¬ÅWait for someone to offer to buy an ATM put or call at the mark, sell them 2 and hedge with 1 spot at market.ââ¬Â
Of my current brokerage accounts (IB, TOS, OptionsXpress) only OX offers pit traded futures options, but they don't have an order type which supports synthetic straddles. It doesn't seem feasible to use two separate orders due to the delay between the fill of the short option and notification - market will likely have moved significantly by the time I get my hedge in.
At this point, I'm seeking general advice, as pit traded options seem pretty scary to me after being used to watching the electronic markets on stocks in real time. Calling a broker and waiting several minutes for them to get a quote on one strike from the floor feels really bizarre!
Also hoping for answers to the following specific questions:
1. Is there an open outcry futures option order roughly equivalent to IBââ¬â¢s volatility order?
2. If so, which brokers provide this type of order, or can accomplish it informally given verbal instruction?
3. Does anyone else trade this way and, if so, would you care to recommend a broker you've had success with?
Once I understand any tricks to getting good fills, such as the best times during the sessions to trade etc., I don't think I'll need too much in the way of research, handholding, and the like. I get my vol data from ivolatility.com and the hedging is purely mechanical via stop orders on the underlying. Basically, just need great fills, low commish, decent interest on margin collateral and credit balances, reasonable rate on debit balances and, of course, account safety.
Many thanks for any input!
-Steve
My derivatives trading experience thus far has been almost exclusively with equity options, as well as a limited amount with electronically traded futures/options. I mainly put on non-directional volatility trades around events such as earnings, FOMC meetings, etc. - usually initiating the trade with a straddle or synthetic straddle and then hedging via positive or negative gamma scalping, although the hedging interval can be much wider than what a lot of people would probably consider gamma scalping.
Since getting a PM account, Iââ¬â¢ve been leaning toward synthetic straddles, as they seem to result in the best fills. I really like IBââ¬â¢s ââ¬Ëvolââ¬â¢ order with dynamic updating and automatic delta hedging, which basically does this:
ââ¬ÅVolatility order ââ¬Â¦allows you to trade volatility instead of price. TWS calculates the limit price of an option as the function of the option's implied volatility. You specify the option volatility, and TWS calculates the limit price for you. ââ¬Â¦ the bid and ask values are displayed as volatility instead of price. You can also enable dynamic management of these volatility orders, where TWS updates the limit price based on movement in the underlying price, cancels the order if the underlying price moves outside a high or low price range, and transmits a delta trade for the underlying when the volatility order executes or partially executes.ââ¬Â
(from http://individuals.interactivebrokers.com/en/trading/orders/vol.php?ib_entity=llc)
I'd like to do a similar type of trading, although less event based, with futures options in the following markets:
Cocoa
Coffee
Corn
Cotton
Crude Oil
Gold
Live Cattle
Silver
Soybeans
Sugar
Swiss Franc or Euro FX
T-Bonds (or maybe 10 yr T-Note)
Wheat
Yen
Of these, the currencies, and possibly bonds, seem to have active electronic markets which I can trade with IB, but the rest are outcry. Grain options just started trading alongside the pit during day, but Iââ¬â¢m not sure if the spreads will become attractive.
Ideally, I want to be able to write straddles that are within 1% of the mark. I'm normally not in a rush, as my tentative time frame is 8 weeks on avg, so I don't mind waiting several hours for a good fill if necessary. In an ideal world I'd give the broker a volatility order as described above, such as:
ââ¬ÅSell 2 (4/6/8 etc) ATM puts or calls for at least X% volatility, then immediately hedge with 1 (2/3/4 etc) futures contracts at the market.ââ¬Â
Somehow, I find it highly doubtful this will be possible, so the next best thing would be something like:
ââ¬ÅWait for someone to offer to buy an ATM put or call at the mark, sell them 2 and hedge with 1 spot at market.ââ¬Â
Of my current brokerage accounts (IB, TOS, OptionsXpress) only OX offers pit traded futures options, but they don't have an order type which supports synthetic straddles. It doesn't seem feasible to use two separate orders due to the delay between the fill of the short option and notification - market will likely have moved significantly by the time I get my hedge in.
At this point, I'm seeking general advice, as pit traded options seem pretty scary to me after being used to watching the electronic markets on stocks in real time. Calling a broker and waiting several minutes for them to get a quote on one strike from the floor feels really bizarre!
Also hoping for answers to the following specific questions:
1. Is there an open outcry futures option order roughly equivalent to IBââ¬â¢s volatility order?
2. If so, which brokers provide this type of order, or can accomplish it informally given verbal instruction?
3. Does anyone else trade this way and, if so, would you care to recommend a broker you've had success with?
Once I understand any tricks to getting good fills, such as the best times during the sessions to trade etc., I don't think I'll need too much in the way of research, handholding, and the like. I get my vol data from ivolatility.com and the hedging is purely mechanical via stop orders on the underlying. Basically, just need great fills, low commish, decent interest on margin collateral and credit balances, reasonable rate on debit balances and, of course, account safety.
Many thanks for any input!
-Steve