Hi, Can anyone explain what happens to a combo order when you put an order in between the bid and the ask? Is it treated the same as a single strike order or is it handled differently? What are the rules for who gets preference on regular option orders and combo orders? Thanks.
Combo orders are handled differently (all based on my experiences). Most of the time (on low volume options), your order won't get filled unless the underlying moves in your favor and the options prices change and your "mid point" becomes the bid when you sell or the ask when you buy. In highly traded options like SPY, your combo orders are seen by the MMs and they might fill your order if they see your price attractive or "fillable". In no condition your combo order is treated as single leg option.
You have that backward. If the underlying moves in your favor your limit orders are even more out of whack and will not be filled. If the underlying moves against you then your order gets filled.
I meant in your favor to get your order filled. Usually a trader has two favors, 1- pre order fill, 2- after order is filled.:eek:
Multileg orders are normally sent to the Complex Order Book (COB) at the exchange for execution. ISE, CBOE, NYSE AMEX and PHLX each have one. You either need another customer to do the other side of your order, or find a Market Maker that sees edge in the trade. These orders are NOT held to the current NBBO at either that exchange or from multiple exchanges. With that said, enough electronic MM "watch" the COB looking for good trades that in liquid options, you can often do trades better than the market NBBO of the legs. You also have no leg risk. You either do both legs or none. Spread orders can be accepted with up to 4 legs plus stock, as long as your platform supports it. Bob
Thanks for the info. I am curious how another customer would see my limit order. It sounds like the MM would never execute it unless it were far enough away from the midpoint that the price would allow them to make something on the spread. If I put a single leg option order in between the spread, all retail customers can see that and it might get hit, but the way you describe the treatment of multi-leg orders, I'm wondering if I could ever sell between the midpoint and the ask or buy between the midpoint and the bid.
Very few platforms allow you to view the COB. I know of two. So most traders will never "see" the order. If the NBBO on a spread is 1.00/1.10 and you bid 1.05 for 10. Your order will sit on the COB until either another customer that is a seller offering the spread at 1.05 OB. Or, the MM that monitor the COB electronically with what I call an 'electronic eye", sees value in their pricing model to sell the spread at your price. This might occur if the stock changes in price or vols change.