% Chance of being filled

Discussion in 'Options' started by heiasafari, Aug 9, 2009.

  1. I was wondering something about market makers...

    Lets say for example that you think that RUT is not going to be below 490 at the august expiration. Its very conservative I know but its just as an example...

    Well then you could do one of these 2 things:

    1) You buy a call spread 480/490 (buy the 480 and sell the 490) for a net debit of 9.75$. So lets say its 100 contracts:

    Total debit and max risk: 9.75*100*100= 97 500$

    Max Gain: 0.25*100*100= 2500$.

    2) A short put spread 480/490 (buy the 480 and sell the 490) for a net credit of 0.25$.

    Max gain and net credit:
    0.25*100*100= 2500$

    Max loss: (10-0.25)*100*100= 97 500$

    As you can see, same strike of 490 for max profit, same max loss, same max gain. Nonewithstanding the carrying cost since its 10 days and the 10 days risk-free rate is minimal and I think it could be discarded (read the next paragraph).

    In a case like this, would you say that you have better chances of getting filled on either one of them or they would be the same? IMO the market maker would prefer filling the first one considering that he pockets the money up front. If I am right, one could forfeit the 10 days risk free rate to increase the chances of being filled, that would be a fair tradeoff wouldn't it?
  2. Interest rates may be low, but they are not zero. Thus, almost every market maker would prefer to sell the spread and collect $9.75 in cash - assuming they are willing to make the trade at that price.

    That gives you a great chance to get filled.

    But, cheap, OTM options are easier to trade because there are always people looking to sell those low-price, high-probability spreads. Thus, not counting market makers, the puts trade more often.

    If this is a realistic question, I'd suggest trying half the order with each. When you have done that a few times, you will have a real world example of which is likelier to fill.

  3. don't sell credit spreads for 40:1 risk/reward.

    you must be correct with 97.5% certainty to have break-even expectation, excluding commissions.
  4. Both spreads have the interest rates priced in so thats a moot point. They're basically the same position and you'd probably have the same odds of getting either one done. If you're expecting to buy near the bid and sell near the offer your expectations are probably out of line.
  5. I wouldn't really care at what exact price it would be. I would send something like that as a spread with a net debit or the equivalent net credit (9.75$ vs 0.25$)

    In any case that was just an example, I never trade RUT. I was just wondering if there was one I had a better chance of being filled on because on the things I trade, my position size tends to be an issue so I want to put the best chances of actually being filled on my side.