Just a little editing needed on the above post by myself-- when I talk about adding the "calls" together to obtain the cost of the total butterfly, I should have said "puts". Sorry for the confusion.
Wow... Thanks John, that was extremely helpful. I'll incorporate this check/calculation on my next fly's. I didn't look too closely at the spreads when I entered the butterfly, I was too worried about all the other things I check. Now I know! I trade butterfly's on one of the Canadian stocks with low volume and high commissions... But so far I've been okay, since I've been followng the underlying closely (technically and fundamentally) for over a year now. I'm okay letting the mm take their cut since I think it will work. After this, I don't think I'll trade low volume options (as you've stated). There's already so much working against retail traders... I'm at the mercy of the market. I don't want to also be at the mercy of the market maker when I'm right. Anyways, thanks again
Fine explanation, JohnGreen. Is there any chance that I can contract your services in the future for taking care of follow up questions to my posts?
Using Johns' quotes for puts for the Mar '10 butterfly: 100P $0.70-$1.40 105P $1.90-$3.40 110P $4.00-$8.00 ...with a midpoint of $1.75 Giving me 3/4 of the B/A spread would be a credit of maybe 15 cts (see below). I would not dabble with options with such wide spreads unless I got a fantastic fill near the opposite end of the natural and that's not likely to happen too often. For example, if I wanted to sell the 105/100p vertical, the natural would be $.50 x 2.70 with a midpoint of $1.60. I wouldn't touch it unless the credit was somewhere in the vicinity of $2.30 to $2.40 so if forced to exit at mkt prices, the pain wouldn't be as severe. Pay to play when something is liquid and moving. Sit there and wait for a fool to show up when dealing with stagnant Holland Tunnel wide B/A spreads. Regarding entering and exiting positions like this, it's a good idea to look at combo orders for any other available platform orders that the ingredients could be recombined into. One possibility would be the 100/105p and 105/110p verticals. Another would be 100/110p strangle with the two 105 p's as a standalone (not a good pairing because the 100p has the smallest spread and you want to work the largest spreads in your combos). And lastly, a 1x2 ratio for the 110/105p vertical with the 100p as a standalone. These quotes are a nightmare but let's pretend it's worth chasing. The easiest thing to do is to place the butterfly with the price that you want. For the moment, say a debit of $1.75. Filled? Done. Since the Mar 100p costs $1.40, if I could get the 1X2 110/105p ratio for better than a debit of 35 cts, I'd have a better fill than the midpoint of $1.75 I would consider 2 possibilities. 1) Set a price alert at a better price on the butterfly and on the 1x2 ratio (50-75 cts, whatever) and hope someone shows up, or 2) Place crazy orders for one or both orders - say giving me 3/4 of the spread difference. In the case of the butterfly, that's a credit of 15 cts and for the 1x2 ratio it's +$1.05. The 1x2 ratio leg in would yield a poorer net fill with these numbers (- 35 cts) since the last leg is paid for at the market ($1.40). The prices are not imp't (I hope the calcs are not fuzzy mathed). The imp't thing is to grasp the possibility of getting to the same place differently and better. IRL, you often see better prices on combo components of multilegged larger combo positions. CAVEAT: If one does not have the ability, discipline and temperament for legging in and/or taking short/naked positions first, one should only consider entry into alternate possibilities from the long side (or at least net long) and then execute remaining short legs last.
erol, thanks for the compliment. Spin, Another superb post, as usual! Nice to see you're still thinking on your own.. With the amount of posts you have, I'll take a serious pass on being your secretary !!! With these wide spreads, playing around with alternate entry methods is a good way to get better pricing. If I were interested in this, though, my first shot would be to go for 1.75-- the exact midpoint. Then, after a few minutes had passed without a fill, I'd slowly start raising the bid 5 cents at a time, perhaps up to three or four times at the most, knowing that every time I bid up, it increases the slippage I'm giving up. After that, if I still really wanted to play the game, I'd go to verticals, and ratios, etc. I've messed up once or twice trying to do this in stages, however, so I really prefer to go for what I want in the most straightforward way, particularly at the entry. I will not worry too much about not getting filled on an entry. There are always other opportunities, and starting a position right is an important part of being successful in this business. By the way, erol, I'm also a Canadian, and one of the first customers in Canada for TOS, I think. I'm hoping that since TOS is owned by TD Ameritrade whose parent company is the TD bank, that they'll make a few opportunities available to hold Canadian securities under their umbrella. That would definitely simplify my life. I'm really hoping they don't mess up what is a tremendously good thing with higher commissions, or even dream of ruining the outstanding software that TOS has for orders. It's a thing of beauty.
this is awesome.. i never thought of that... legging in through verticals... I've legged out through verticals but never in. thanks spin! learned a lot through this actually.
That's pretty cool... must have been happy when you heard they opened a Canadian arm! I really hope TOS can do Canadian equity and equity options! What i'm worried about (like you) is the commission structure. I've honestly learned this game a lot faster with TOS, and I hope I can continue using it with the commission I pay. I'm waiting to see what TD does in the new year. If they keep my commissions i'll stay, if not i'll have to go to IB.