optimize your timing for better fills
Hello, traders. We’re talking ways to improve your order fills for better “bargains” in options trades, multi-leg strategies in particular. In my last post, we discussed how the mid-point of your strategy quote tells you your market-maker’s “wholesale” price for the trade, providing a great jumping-off point for choosing your own target price.
Today we’re taking that a step further, asking: how can you optimize the timing of your trade so that you can improve the quality of your fill? As it turns out, when you send your multi-leg trade to market can make a big difference in your execution quality.
First let’s define the term “multi-leg”. Often brokerages refer to each option contract in a strategy as a “leg” of that strategy. So a spread trade (buy call + sell call) would be referred to as a two-legged trade, and a butterfly has three legs. Many of the 3- leg-or-more strategies (condors and butterflies, for instance) tend to be geared towards a neutral outlook on the market. Now with that said, you can do some crazy things with options so this is a very general statement.
Let’s assume we’re entering a more neutral market strategy. If you do your research in the early morning as many of us do, it’s SO tempting to send that order first thing and try to get filled at the market open.
At the open, your order becomes part of the day’s price-discovery for the market – which is a nice way of saying you become a guinea-pig. Markets “gap” at the open, where new information and orders from overnight can translate to dramatic differences between where options closed the day before and open the next. Why throw your multi-leg strategy into this mix if you don’t have to?
What about lunchtime then? That’s a quieter time of day, when the day’s trading rhythm is more established and you are probably more knowledgeable about the day’s price levels. Midday can be a good time to enter your multi-leg order, but stay patient. Market-makers still have hours ahead of them, so they may not fall all over themselves to give you an immediate fill.
As markets near the day’s close, though, market-makers’ thinking runs along different lines. Market-makers are always careful about overnight risk, so towards the day’s end they are usually looking for ways to hedge any risks into the next day. That is, their top consideration at in those late-day hours might be less about price and more about balancing out their positions for optimal risk management. If your multi-leg trade fits in as a good hedge against an existing position of theirs, you may find yourself benefitting from that with a quality fill towards the day’s end.
What if you don’t get filled that day? Since we’re talking about a multi-leg option strategy, I’ll ask another question in return: who cares? If you’re doing your butterfly or condor and you’re at least 45 days out, chances are things aren’t going to change terribly between today and tomorrow anyway. The long butterfly or long condor spread we teed up in my initial post is a market-neutral strategy where you don’t want much to change, and usually the action doesn’t heat up so early before expiration anyway.
In fact, if you have reason to believe things will really change fast with one of these strategies overnight, you should wonder whether entering a neutral b-fly is actually a smart move in the first place.
Next up: we’ll clear up a few remaining questions in this series…and feel free to add your own to the mix!
TradeKing's Options Guy
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