Are Options FIFO?

I thought options were FIFO but I'm not so sure anymore. The other day I was trading options on C and saw some weird things happen when I would undercut the bid or ask (suddenly tons of options swarming in on the new bid or ask, and then suddenly dissappearing when I took mine out -- usually always the same number).

Another thing -- at the end of the day I notice really horrible fills on options that I'm monitoring. I've seen people pay 50% too much or getting a really bad price for a sell -- this is AFTER options trading time -- so WTF?

I haven't read anywhere in a book how they jerk people around in the options market -- any ideas / comments?

 

Excellent question.

"Know your target profit before you trade" is a venerable trading axiom.
But for years, I've also made it a practice to extend this axiom, to immediately placing the closing order, GTC, as soon as the opening order is filled -- on the assumption that options are FIFO.

Maybe there's no edge to this practice, after all.

(This is less effective on IB, which I just recently learned resets GTC orders each day.)

 

The other day there was an MSFT spread of 3.60x3.80 for the $55 PUT.

I wanted to buy it, but not for $3.80. I put in an order for $3.70, and got instantly filled. The bid never changed.

What I'd like to know is -- if nobody was asking $3.70 for it, how did I buy it for $3.70 without the bid ever showing my $3.70?

I'd also like to find out how all these various Option markets work -- but I have a funny feeling that they don't all operate the same. ISM, AMEX, Chicago, etc.

I'm going to set up a computer program to play with the bid and asks of illiquid small options just to see if another computer program adjusts to my bid/ask. I'm also going to try it with each exchange and see if I can figure out anything interesting.

 

Just to let you know, if you enter a limit order bid for an option, and a MM shows that order on the market only with larger size, you cannot withdraw your order and then proceed to hit that bid. I forget what the exact term for this is.

 

Small lot baiting is a similar, but slightly different concept.

Metooxx would know better than I.

Besides, as soon as you pull your bid, the MM will cancel his part of the order before you get an out, I would think.

 

How many contracts on what exchange?

 

That is what it sounds like to me; however it won't work.

And, if you get it to work you will be in deep shit.

Do not try it ...

 

It varied. ISM -- Several hundred on the ask and several hundred on the bid. When MSFT started to move down, the bid number started dropping. Every time I put 1 contract up for a bid that was a new price, I'd get 10 more put on with mine. As soon as I took it off, the bid would drop.

I did this a dozen times and each time, like clockwork, someone was putting contracts on the new bid with my contract.

Once I find out how these computer programs operate, I'm going to see if I can't exploit something.

Whatever it was -- it was very fast. If it is local at the exchange, I could never beat that speed -- but if its going through the internet, perhaps I could try to program something fast enough to move the bid up or ask down and hit it quick.

 

There are some misc. rules out there about an order under a 10 lot the DPM has to fill it if it is within X or post it and stand good for the balance. I am pretty sure about the ISE, but the rest of the exchanges are different.

You are on the brink of exploring SMALL LOT BAITING; DO NOT DO IT.

You will be caught;

you are a few years late in figuring out what you are about to ...

 

I agree. Through the orderbook, the specialist can see which clearing firm the order comes from, and if he sees you doing that a couple of times, he will report to compliance, and you will be tracked down.
Specialists might not always be very well educated, but they sure are not stupid.
If your order never shows on the book it means it was immediately executed either because the specialist or an MM likes to buy resp. sell at that level or they don't want that order showing on the book, maybe because they know an institution with a much more size order is watching that line.