How to deal with options' Slippage?

Discussion in 'Options' started by qll, Apr 11, 2007.

  1. qll


    For the most time, bid and ask move to the same direction and no volume is traded. If I want to enter or exit, I have to pay 5% or 10% slippage between bid and ask.

    Is the bid and ask slippage artificially enlarged by specialists? like how they do it on OTCBB markets?
  2. MTE


    The bid/ask spread is the function of liquidity. Less liquidity means wider spread as the market makers have to protect themselves. Also, with the exception of stocks on penny-pricing pilot program, the minimum tick is 0.05 for options under 3.00 and 0.10 for options over 3.00. So for a 1.00 options a 5% spread is not artificial spread widening, it's just the lowest spread possible.
  3. cdowis


    Question: I have see some equities with small liquidity in options (200-300 in OI), but the bid/ask spread is relatively small.

    I'm afraid to trade options in such equities, but not sure.

    Any comments.
  4. It's not a matter of opening the position. It is a matter of closing the position.

    If you've got time you can always work with these thinly traded options. The problems come when the underlying is moving against you very quickly. During these times you're gonna take a hit. Also stops are pretty much worthless on thinly traded options.
  5. hopback


    Also keep in mind that stops on options are triggered differently than stops on stocks.

    a sell stop on an option is triggered by a print or the offer.

    a buy stop on a print or bid.

    that adds to your slippage
  6. Also, very important that you see which exchange the options are traded on. You might buy an option without thinking about it, but if there is only 1 MM making a market, where is the competition? I hold some leaps that are only traded on PHLX, the spread is $4.00 . Stock is only $11 . Good stuff :) Probably end up exercising these puppies...
  7. cdowis


    Thanks to you all for the response.
  8. 0steve


    What about slippage on very liquid index options?

    At times, I like to trade the SPY & QQQQ options based on the technicals for the underlying. But I frequently get in trouble when my "real" job demands my full attention and I'm not able to stay next to my monitor.

    Is there any good trailing-stop methodology that anyone has found useful for this kind of situation? Perhaps, for example, one could take the underlying's ATR and multiply that by some decimal to get a decent trailing stop....

  9. Setting stops on options and buying/selling them at market will get you killed by slippage.

  10. I can see one problem with using stops on options on SPY. For example, last quote for 147 call is bid @ .45, ask @ .55 . Theo price is .50 . You could get a fill at .50 more than likely (using a limit), but with a market, you'd get .45 (assuming you were selling) .

    With the Q's I don't think it would be so much of a problem because of the penny pricing. Last quotes on the ATM Q's are .36 x .37 . A penny wide, can't see too much going wrong there, plenty of liquidity.
    #10     Apr 16, 2007