How do you folks deal

    Posted by rojoch on 24th of Dec 2019 at 01:05 pm

    How do you folks deal with the (often huge) bid/ask spread on Options?  Sometimes the spread is as big as 40% (!), or 10% on Options that are getting some regular volume.

    Seems like they're run by an automated process that reacts to the orders you place. 

    I remember Matt saying that he tries to go one tick past the mid-range (above when buying, below when selling) but quite often I've found that just bumps the bid (or ask) to my price and sometimes even bumps the other end of the range away from me.

    After 10-15 minutes, the range often tightens up (and may in fact fill), but this huge uncertainty in what price I can get a fill at really makes it tough.

    Any advice?



    I think it's pretty simple

    Posted by stevieb294 on 25th of Dec 2019 at 08:46 am

    I think it's pretty simple really.  I trade credit spreads on stocks and the SPX and I always use the midpoint to enter and exit.  I always get filled and I never (rarely) chase the price. I think a lot of traders make it way more complicated than it has to be.

    I look first at the

    Posted by jwilder on 25th of Dec 2019 at 10:11 am

    I look first at the volume and the # of bids on each side and the open interest - then put in a day bid (if vol of bids is high) a nickle over the horde. I get filled on at least 1/2; often 5 minutes before the market closes.  That's often with the price of the underlying flat.

    Know the upper limit of

    Posted by jtsurfah on 24th of Dec 2019 at 01:18 pm

    Know the upper limit of the premium (extrinsic value) you're willing to pay and set your limits there.  Of course, premium will change relative to your bid  price as the underlying moves - so, if you don't get filled, you can't leave your order in place for very long without adjusting it.  I almost always use spreads, so my calculation is a combination of long & short premium in order to arrive at the total premium I plan to collect (typically collecting premium vs paying it).  For the most part, I stick to options with much tighter spreads than what you're describing. 

    Interesting.  Unfortunately, this is all

    Posted by rojoch on 24th of Dec 2019 at 01:42 pm

    Interesting.  Unfortunately, this is all within Registered accounts, so I'm not allowed to sell-to-open any options except Covered Calls.  I can only buy Calls, buy Puts, and sell Covered Calls.

    It seems like the bid/ask spread widens when I place an order, hoping to draw me into chasing it.  If I adjust my bid price within a minute or so, the ask will continue to move up, even if the underlying isn't moving.  However, if I do nothing, the underlying will eventually start moving the bid and ask prices in tandem with it and if I get lucky, it will move through my bid price and fill.

    This happened to me with VNQ--an ETF that trades almost 6M shares per day.  The option bid/ask spread is currently almost 8% (1.90 - 2.05).

    Even on SPY options, I regularly see a bid/ask spread of 2% +

    Is it because there typically is such a big potential percentage profit to be made that the market makers know you'll tolerate more slippage on entry/exit?


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