Looking at a stock that let's say trades 500k-1MM of stock a day. The option market will be pretty illiquid. This illiquidity should keep many big players out. So my question is who are making these markets and would they be less efficient?
The efficiency of small-mid cap options market
- Thread starter jordanwrong
- Start date
Those markets are very efficient as option pricing technology is highly advanced.
Also, the bid/ask spread is tough to fade.
My old stomping grounds. Just walk your order towards the other side slowly, and you'll get filled decently.
Some won't let you out without taking a major hit unless you're ITM. Some are as ridiculous as not letting you out without asking below intrinsic value.
Even if you patiently walk your orders, the effective spread will be much wider than nearly everyone is used to.
Some won't let you out without taking a major hit unless you're ITM. Some are as ridiculous as not letting you out without asking below intrinsic value.
Even if you patiently walk your orders, the effective spread will be much wider than nearly everyone is used to.
It seems everyone here doesn't trade them and the open interest proves that no one trades them. If no one is trading them then how the hell can they be efficient (reflect all participants ideas). I understand the bid ask is insane. Thanks for sharing your idea ERROR Correction
The markets simply get wider. Nobody is babysitting these issues. It's all bots. Assume that mid (TV) is 20% vol. AAPL may be 20.8% x 21.1% NBBO. The illiquid issue at 20%-mid may be 10% x 30% NBBO bid/ask. So you offer inside and your market is legitimately showing price-taking interest... you need to find another buy-sider to meet you. MMers in these require a whole lotta edge.
@destriero can I find you on other forums as well?
But if your trading Netflix vol you would also need a lot of edge. I'm sure there would be a few money managers/ retail who would love to sell me some cheap calls on NBBO. Or cheap insurance. In AAPL that would be arbed away so fast.
Options away from ATM don't trade much on major issues either. Throughout the day, watch a few SPY options close to ATM. You can see the volume fade away from whichever used to be ATM to whichever now is. One can't really say that the dormant options are inefficient when not traded and suddenly efficient when ATM. All options tied to an underlying should be considered one general unit.
The true option price is implied volatility. All other variables are more or less known. Somewhere in the NBBO is the equilibrium price, and the market making algorithms all essentially have the same target. For safety, they expand the band at which they'll trade.
But it's an illiquid underlying, and they can't sell you an option at the same time as buying from someone else, so that band expands even further to alleviate delta risk and cost.
Even still, the option series itself has little volume, so an even wider band is necessary.
It all depends on which algos are trading it. Sometimes you can find a great algo that will be reasonable. Other times, it'll be greedy and only trade with you very close to the bid ask spread. Those issues should be avoided like the plague. You may be correct on your option only to get killed trying to get out.
I used to be on Wilmott but not anymore. True, but GOOG has become very difficult to trade within a dollar of mid.
Two years ago you could trade AAPL vol tighter than the shares. No longer the case. Microstructure efficiency moves inversely-proportional to vola.