Watch yourself this morning

Watch yourself this morning.  The bid/ask spreads on many issues are extremely large.  This is probably due to the fact that many MM are on vacation and the juniors have been left in charge with instructions “Do no evil”.  For most of them that means, don’t trade unless you find an idiot on the other side.    

mixed experience this morning - ORCL options filled in the middle, MJN had to give up some spread

As the market opened I covered the ORCL 26p for .73, that I sold six days ago for 1.54.  I don’t think the market has been that low since.  I conjecture that someone will have their hat handed to them next week for getting too antsy and accepting my offer at the open. I’ve been trying to sell the Mar 26p’ s, on the off chance that they will make the same mistake at the other end.  No, I’m not counting on it, but I’ll say this is why you should always use limit orders, unless you know it is a tight spread and you must trade.    

spshapiro said: As the market opened I covered the ORCL 26p for .73, that I sold six days ago for 1.54.  I don’t think the market has been that low since.  I conjecture that someone will have their hat handed to them next week for getting too antsy and accepting my offer at the open. I’ve been trying to sell the Mar 26p’ s, on the off chance that they will make the same mistake at the other end.  No, I’m not counting on it, but I’ll say this is why you should always use limit orders, unless you know it is a tight spread and you must trade.    

 
Anyone not using Limit orders when doing options should be slapped up side the head.  When you fill at market your leaving all your money on the table and allowing the MM dictate your profits or losses.  ALWAYS use limits...  

Nuff said.

I don’t think that the two of you have much of a difference.  By and large, limit orders are the safest way to go.  There are some issues, like INTC and CSCO, that for the most frequently traded options, trade for a penny spread. If you are willing to make that trade, you will not get ripped. But most of the time, I put in a bid that would mean that the market has to move in my direction, for it to be filled.  I am willing to accept that I will not get a fill.  After sometime, it is possible to get a sense of how much a market might move, and so I’ve been better at finding these points as time has gone on.  Sometimes when I have sold an option and want to close the position, I will use a market order under tree’s conditions. This is not the norm.

Perhaps Wolfy (the Allstar) has something to add, since he is an ex-MM.    

By using limits the trader is the one that dictates what price will be paid and not leaving it up to the MM.  I think we all know this, but my point is I am not going to just leave my trades to a MM to tell me the price I will pay.  I am not the type of trader that HAS to get into a trade.  I will never, ever, ever get into a trade using market orders.  I have patience and a specific price I am looking to get into the trade at and if it doesn't trigger then on to the next day or the next trade.  Back when I first stated trading options and was still a rookie I used a market order once, and that was only to get out of the trade because I had already lost about everything, and the main reason was due to option volume.  Never will do that again.

You mentioned MA above.  I have looked at the stock before but currently I am not interested in if for my trading style.  I mostly do weekly's and MA just doesn't have the options volume I am looking for in order to trade weekly's.  But even for monthly options you should always be looking at volume just for the simple fact that if you don't have volume you will have a harder time entering the trade and exiting if you are selling options.  A higher volume means I have a higher chance at getting in and getting out of the trade using limits because there is more activity and the chances my limit get filled are high.  Low volume options tend to not trigger as often when using limits and would tend to either sit and never get filled or change to a market order and let the MM do the trading and price setting for you.  I am not a fan of that type of trading and will never be.  I have patience and if my trade doesn't trigger at my limit price (debit or credit) I will not enter the trade.  

There are always good trades out there every week.  Be patient and let the trades come to you using limits.  Don't chase them using market orders.  

That's my style of trading and I understand that everyone has there own style.  But all I have to say is good luck to you if you use market orders.

 

I could be both, but is found more often in options.  The spread is directly related to the interest in an issue.  A MM could never maintain a wide spread in an issue that is traded frequently, because people would keep bidding inside the spread and it would naturally narrow.  The MM’s job is to make the market, and so (s)he must follow what the open offers are; remember they don’t make any money unless trades happen. But when an issue is not trading (much) the MM must put out a bid and an ask. They will make it as wide as they think they can get away with.

I have noted in early threads about how I will try to get a MM to chase my bid, when trading a thinly traded issue, but this can be dangerous, and I wouldn’t recommend doing this in an issue you are not very familiar with, and okay to wind up owning. Today I sold TYC Feb 45p’s @ 1.55,  The open interest was 25, which means it trades by appointment.  The spread this morning was (I believe 1.05-/1.4) at the open, and I used a limit order, and I wasn’t going to drop it to meet the market. I also sold some CHKP Feb 52.5p (O/I was 435), where I inside the dime spread, making the market. When it didn’t get executed, I move my price up playing ‘hopscotch’ with the MM, until it was taken.    

This will only work, when it does with thinly traded issues; after all, if many people are bidding on an option, your bid will not be likely to color the market much, or for long. Also, this will not tend to work where there is already a tight spread, but that generally goes hand in hand with an active market.  Remember the MM makes most of their money by trading the spread. Lastly, I NEVER do this with an issue that I would not mind owning.  No rich premium is worth holding an issue you don’t want, and if it is lightly traded you could wind up owning the stock or having to pay a bigger premium to exit.

Say that the spread on the option is $1/$2, and more likely than not, it is not trading.  The MM is likely to be offering to buy it for a dollar and sell it for two.  It could be a third party’s offer, but more likely than not with the spread so wide the MM would cut the offer by a nickel (and still make money). If you cut him by a nickel or dime, it should change the market to 1/1.9(5). (If it doesn’t, call Tk, cancel your original order and ask then to place it on the exchange where the quotes are coming from.)  What you may find is that in short order the MM will cut your offer by a nickel; you see $1.90 is almost as good 2 dollars.  You may get him/her to follow if you repeat, but at some point they will stop.  You will have narrowed the spread and you may find an offer, because it moving the market, you may attract another third party. Once again, don’t make an offer that you are not willing to honor; this is not a game, someone can always take you up on the offer.

Now, suppose once again the bid/ask (on a Call) is 1/2, and the market starts moving up. You could place an offer to sell @ 2.05, and find that it shortly becomes the market offer.  Remember, under these circumstances someone else could have a prior  ask in at 2.05 and their order would have priority in the queue, but if we are talking about a thinly traded issue, it is less likely. Say the market is still heading up and the current quote is now, 1.2/2.05: if the market is moving up, you could now change your offer to 2.15. Notice I didn’t say 2.10. The MM undoubtedably took that as soon as you jumped him.  You could take 2.1, but you’ll never know when your offer is the market one, until it goes off.  If you take 2.15, and the market stays up, when the MM vacates his order, you can be more assured that you are in front.  In an up market, you might be able to play this a couple of times, depending on the MM’s patience. If the price later in the day reaches say  1.7/2.35, and you all of a sudden drop your offer to 2.15-2.2, you might find it quickly taken.  This higher offer is considerable improvement over the morning’s opening.  Yes, the underlying’s market value has moved up, but if it moved that much this morning, it could lose that much as well.  If I can sell at 2.15 and buy back within the week at 1.65, maybe 1.35, I would take that again, and again.

This activity works best opening a position as opposed to closing a position.  First, when you hold an option, as you implied, time is deteriorating the value of your option.  The MM knows this, and knows the pressure is on you. Second the closer expiration comes, the greater the pressure is, and the less inclined the MM would be to want to add options that will likely be soon worthless to his inventory. When it gets close to expiration, if you want to close you have to offer inside the spread, and if you just undercut the MM, they will likely turn around and undercut you rather than take your offer.  The closer to expiration the closer to the worst price of the spread you will have to come with your offer.  Remember, it is silly to ever think that you are trading with a fool, nobody is in business to help you out of a jam.