Why are some strikes way more liquid?

Size and market going out. Market going out can be critical.
Where do you think the Morgan Stanley router takes the Etrade flow now.
It can clear OCC and you would know cleared and traded might match or not. When they don't you have a sense of what's going on.
Another factor in liquidity can be "how many venues does it trade on. No monopoly for SPY. SPx can only trade a destination with a license and CBOE has the exchange monopoly, but there are a number of upstairs licenses.
Open interest is not worthless, but it's yesterday's number and IMHO stale for trading purposes.

It's not the 2 lot that gets internalized, it's the 1000 2 lots.
 
ajacobson said:
Size and market going out. Market going out can be critical.
Where do you think the Morgan Stanley router takes the Etrade flow now.
It can clear OCC and you would know cleared and traded might match or not. When they don't you have a sense of what's going on.
Another factor in liquidity can be "how many venues does it trade on. No monopoly for SPY. SPx can only trade a destination with a license and CBOE has the exchange monopoly, but there are a number of upstairs licenses.
Open interest is not worthless, but it's yesterday's number and IMHO stale for trading purposes.

It's not the 2 lot that gets internalized, it's the 1000 2 lots.
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You're going to have to explain this one better. My understanding is all option trades must be executed on an exchange (with the exception of OTC trades not guaranteed by the OCC)

Directly from the OCC
"As mandated by the SEC, standardized U.S. equity options are to be executed solely on exchanges. All equity options in the U.S. are issued and cleared by OCC, and are interchangeable across options exchanges, except in the case of contracts that are licensed exclusively to one exchange"
OCC At A Glance (theocc.com)

Trades may be shopped upstairs, but the still need to be executed on an exchange. Exchanges may have different rules on crosses (how long to expose to market, how much of the trade is guaranteed to whoever brings it to market, etc.) but the execution still need to take place on the an exchange and the public can see it in time and sales.

If you understand this differently, I would appreciate your comments.
 
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FSU said:
You're going to have to explain this one better. My understanding is all option trades must be executed on an exchange (with the exception of OTC trades not guaranteed by the OCC)

Directly from the OCC
"As mandated by the SEC, standardized U.S. equity options are to be executed solely on exchanges. All equity options in the U.S. are issued and cleared by OCC, and are interchangeable across options exchanges, except in the case of contracts that are licensed exclusively to one exchange"
OCC At A Glance (theocc.com)

Trades may be shopped upstairs, but the still need to be executed on an exchange. Exchanges may have different rules on crosses (how long to expose to market, how much of the trade is guaranteed to whoever brings it to market, etch) but the execution still need to take place on the an exchange and the public can see it in time and sales.

If you understand this differently, I would appreciate your comments.
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this was my understanding too.
 
OTC S&P 500 Equity Index®
Description: Contracts will contain certain bespoke attributes and are subject to a set of certain parameters.

Type: Call or Put

Unit of Trade: One contract equals $1.00 (the index multiplier) times the index level

Premium Quotations: Stated in points and decimals

Exercise Price: Any positive number

Exercise Style: American or European

Exercise Valuation: Settle On Open (ticker = SET), which is calculated using the opening sales price in the primary market of each component security on the expiration date; or Settle On Close, which is the official closing price of the S&P 500® Index as reported by Standard & Poor's.

Premium Payment Date: Any valid business date

Expiration Dates: May be any OCC business day, provided that the expiration date is specified to be at least four months, and may not be more than 5 years after the date on which the trade is executed by the initial parties to the trade. Trades are subject to parameters listed below:

  • Have an expiration date greater than four months and not more than 5 years. In some cases closing transactions will be accepted for expiration dates under four months.
  • For initial maturities greater than four months and less than or equal to nine months after the date the trade was executed: a minimum notional value of $500,000 times the value of the S&P 500® Index at the opening of business in New York on the first business day of the calendar year in which the transaction was accepted by OCC is required for the trade to be eligible for clearing.
  • For initial maturities greater than nine months but less than three years after the date the trade was originally executed: minimum notional value of at least $100,000 times the value of the S&P 500® Index at the opening of business in New York on the first business day of the calendar year in which the transaction was accepted by OCC. As indicated, notional value requirements are waived for closing transactions, except for dealer closing transactions that result in a customer open position (then Notional Value Requirements apply).
  • For initial maturities greater than three years, there is no minimum notional value requirement.
Settlement Type: Cash (USD)


This is for submission to OCC. You can just do a trade directly with contra and you would have contra risk.
 
ajacobson said:
OTC S&P 500 Equity Index®
Description: Contracts will contain certain bespoke attributes and are subject to a set of certain parameters.

Type: Call or Put

Unit of Trade: One contract equals $1.00 (the index multiplier) times the index level

Premium Quotations: Stated in points and decimals

Exercise Price: Any positive number

Exercise Style: American or European

Exercise Valuation: Settle On Open (ticker = SET), which is calculated using the opening sales price in the primary market of each component security on the expiration date; or Settle On Close, which is the official closing price of the S&P 500® Index as reported by Standard & Poor's.

Premium Payment Date: Any valid business date

Expiration Dates: May be any OCC business day, provided that the expiration date is specified to be at least four months, and may not be more than 5 years after the date on which the trade is executed by the initial parties to the trade. Trades are subject to parameters listed below:

  • Have an expiration date greater than four months and not more than 5 years. In some cases closing transactions will be accepted for expiration dates under four months.
  • For initial maturities greater than four months and less than or equal to nine months after the date the trade was executed: a minimum notional value of $500,000 times the value of the S&P 500® Index at the opening of business in New York on the first business day of the calendar year in which the transaction was accepted by OCC is required for the trade to be eligible for clearing.
  • For initial maturities greater than nine months but less than three years after the date the trade was originally executed: minimum notional value of at least $100,000 times the value of the S&P 500® Index at the opening of business in New York on the first business day of the calendar year in which the transaction was accepted by OCC. As indicated, notional value requirements are waived for closing transactions, except for dealer closing transactions that result in a customer open position (then Notional Value Requirements apply).
  • For initial maturities greater than three years, there is no minimum notional value requirement.
Settlement Type: Cash (USD)


This is for submission to OCC. You can just do a trade directly with contra and you would have contra risk.
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So you seem to be saying exactly what I said. This would be an OTC trade without OCC guarantees, subject to contra party risk. If you want OCC guarantee or a standardized option that can be traded out of on any of the exchanges, it must be executed on an exchange.

Are you saying something different?
 
Yeah. An OCC member can trade OTC off an exchange - generally upstairs - and bring it to OCC to clear.
SPX only but the original plan was all cash-settled index.
 
ajacobson said:
Yeah. An OCC member can trade OTC off an exchange - generally upstairs - and bring it to OCC to clear.
SPX only but the original plan was all cash-settled index.
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Not saying this may not be true, but have never heard of this. The OCC site itself says a trade must be executed on an exchange (for a standard contract for OCC guarantee, non OTC). In my years of trading, there was always a fight on how much would be allowed to cross of an order with threats of going to another exchange. If the trade could take place upstairs, they wouldn't need to have done this. Trades are posted in time and sales by exchange. How would this trade be posted?

If you are saying an upstairs (non exchange executed) trade can be guaranteed by the OCC and still be a standardized contract to be traded again on any exchange, I would love to see some type of proof of this statement.

I remain extremely doubtful this is true, but am always willing to be educated if I am wrong.
 
ajacobson said:
Good luck trading!
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What a cop out.

You have been in this business for a long time, including the education arm. You made a statement that goes against what is specifically stated on the OCC site. Instead of either admitting you are wrong, are partially wrong or teaching us why you are right through documentation, you just say "good luck trading". Being in option education that long, I would think you would want to educate.

You did this a while ago on a discussion of exercise cutoff times. You offered a different opinion of what the OCC specifically stated, what was quoted in numerous sites, what 2 different compliance officers told me. Again instead of offering any proof, you simply said something like "you are entitled to your opinion."

I come to this site to offer my experience and to learn new things. I am happy to learn new things. If I am wrong, that's great, this means I have learned something new.

You do no one any favors by making statements and refusing to back them up in any way.
 
My posting, with the exception of the last line, was a cut/paste from the OCC page. I post under my own name and I have a MarkersWiki bio.
When I left the CBOE in 2000 a handful of desks had bigger OI than the CBOE. I still run a shop and if you'd like to visit us - shoot me an IM. Makes me believe you're here for ego, not education.
 
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