What Martin says.
But you're probably worrying too much, unless you're completely UR and risking ruin every day. Cheap wingstrikes. If things crater, you have to trade. That's the business.
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What is the best way to lock/exit all positions for option traders?
- Thread starter 4ever_911
- Start date
What Martin says.
But you're probably worrying too much, unless you're completely UR and risking ruin every day. Cheap wingstrikes. If things crater, you have to trade. That's the business.
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Hi Tom, many thanks for that. Could you spell out the short gamma alarm in a bit more detail.
I trade through IB, and so do all my analytics (market, position, portfolio) on a spreadsheet.
With regard to position and portfolio questions, I have various alarms that might suggest attention {for my trading day}, and among them is a ratio question, which I THINK is....
=@CELL+IF(positiondelta/positiongamma ≥ 10; "";"Γ")
Which will give you whatever the cell reference is, and then append either a blank space, or a capital Gamma. This little tool came from hours of staring at print-outs of delta/gamma ratios by strike, position, and expiry. I invite you to do the same, and see what rule you might prefer.
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I think the best way is just to choose more liquid options to trade so in case it's not going your way, you can exit at better prices. The spread on options is really related to the market cap of the underlying. If the spread of an option is too wide to the point that you can't exit your positions easily, chances are the underlying is not very big either and there is no point casting your line in small pond when you can catch larger fish easier in a bigger lake.
You might want to research that.
SPX weekly(s) at deltas around 0.15 trade in the 10s of thousands per day, with open interest heading towards 100ks. The bid-ask spread is very consistently around 40¢ for the first month (maybe 5 expiries??) -- about 1xMID for the calls, about 1.5xMID for the puts. For the third-week 'majors', the volume and open interest are about 10x the 'minor' weeklys, while the bid/ask spread is two to four times as wide.
"Well! That's unexpected!"
Yes it is.
Indeed - why do you think that is so?
I have a *notion* as to why -- that is less than a hypothesis. But with big volume (as compared to the Johnny-come-lately expiries), and much broader strike coverage (as compared to the Johnny-come-lately expiries), one has to wonder who is generating all that volume/open interest? And they are insuring positions wayyyyyy out in the boonies. For what?
Why are they allowing the bid/ask spreads to remain so wide? Why the need to stay in a (time-driven) market with such stinky cross-parties? Why this huge need???
The answer that comes consistently to the fore is "Institutions." In econ, the magic words are "Inelastic Demand (/Supply)" -- no matter the broad market, when you have a boatload of insurance to buy/cross-sell, you have to get it *done*. To borrow from one famous heartless boob, "You go to (market) war with the army (of options) you have, not the one you want." Let the twinkie retailer crowd guppy-about for nickels and dimes -- if you've got to cover X-million dollars in before Market Close, you go and Get-'er Done.
I have not tested this 'notional' hypothesis directly, but I'll admit, I have only seen supporting evidence, and nary a shred of counter-evidence. (And so for me, I have decided to not trade these expiries at all, via verticals. This Homey don' wanna play dat.)
Excellent advice professor. I have been struggling with how to manage net short gamma and this give me some ideas. Thanks again.
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I think main reason is SPX monthly is CBOE exclusive, but SPX weekly can be quoted by other electronic market makers which tightens the spread. This is what i read some time ago, don't know it still holds good.
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