When you place an order to buy a simple spread, say a straddle or a strangle at the natural, how quickly should that order get filled? Should I ever have to pay more than the natural for a position like that? I ask because I put in an order for a straddle at the natural and left it there and was surprised it wasn't getting filled. Called my broker (Thinkorswim) and they were very rude and told me I might have to pay more than the natural. That doesn't seem right to me? (On another note, I'm seriously considering changing brokers, any recommendations?)
Give some specifics. If you mean actually hitting the posted bid or ask then you should be filled immediately. I find it hard to believe that TOS told you that you would have to pay more than the posted offer.
Actually this is complicated. The natural is not an actual market, it's a synthetic market. when you enter a spread it goes onto a spread book. No one on that spread book has to fill your order. If you enter a single leg order to buy on the offer or sell on the bid, you will get filled right away. Not so on a spread. When TOS shows a natural spread they are simply deriving that number from the "combined" bid and offer. It's not an actual market. Therefore he is not guaranteed a fill at the "natural".
wow, didn't expect responses so quickly. Maverick, your explanation makes perfect sense to me. Thank you. I wish the guy I talked to had explained it so elegantly. I was trying to buy a straddle on AKAM. The thing is with AKAM the spreads are penny-wide, so I expected I wouldn't have much trouble getting filled. Do you think that's a good trade Maverick? Also can you recommend any good brokers besides TOS? Thank you.
This is obviously underlying dependent, but I would be surprised if it is common practice these days where the market makers are refusing to fill an order at the currently disseminated NBBO. In the old days we would have never done that, even if the other exchange is off a little you would still fill the small public order then call the other exchange and move them.
interesting....so you're saying even if it's a sythentic market, it's not normal for MM to refuse to fill at the synthetic natural. I have to say I've traded options on AKAM before and always gotten good fills, usually at the midpoint or only slightly worse
OK, time for an example. Say the stock is XYZ. He wants to buy a straddle in Aug. The Aug 100 call is 2.40 at 2.60. The Aug 100 put is 1.30 at 1.50. TOS shows the mid at 3.90 and the natural at 4.10. Neither one of these is a hittable market. If he enters this as a spread trade it will either go on the ISE spread book, the CBOE spread book or held internally at TOS. No one is obligated to fill this order. If he enters two separate orders to buy on both offers, he gets filled immediately.
Let me further add here that just because TOS shows you the natural market, does not mean that is the "real natural market. Some retail guy comes in with a one lot and bids 1.55 on a 1.40 at 1.60 market, TOS shows the spread market .07 tighter now. No one is going to fill a entire spread on that market since the market is not real.
Mav, it has been years since I have been a stock option market maker (I trade futures options now), but are you saying people no longer have the ability to send a spread order to an exchange? There are no brokers walking into the pit? Like I said, if any public spread order came into a pit I was in it got filled at the NBBO at the worst case even if we did not show that market and we didnât agree with the exchange that was disseminating it, or if it was just a one lot. We would give the public 20 no matter what and then fix the market.