Actually I posted something similar under another forum, but it is most related to options right now.. Basically how do I figure out what is the maximum amount of options I can buy without impacting the market more than say 0.1%? For example, I'm looking at AT&T (symbol T)'s option. Let's assume (this would be nice!) my portfolio is $100 million USD and I want to risk no more than 2% in any one option trade on AT&T. That is $2 million worth of premiums. So.. for today for example, let's say I want to buy the July 2004 Call at a strike price of 20 (in-the-money). That is symbol TGD.X. Right now it has a quote price of 1.35. Since each contract is 100 shares, the price per contract would be $135 not including commissions. So with $2 million, I want want to buy 14,814 options. I might be misreading Yahoo charts here-- but it shows volume at "8" and open interest at 14,784. So this might not work too well. I guessing volume of "8" on Yahoo charts means something more like 800 or 8,000 or something like that to make any sense. But just based on open interest, I would be buying more contracts than are currently open!! That can't be good.. So I have a few questions.. does the volume of 8 really mean only 8 contracts were traded? That doesn't seem to make sense to me, it is a bit too low. But the real question is how can I determine what is the most number of contracts that I can trade on this day without impacting the price of the option too much (say 0.1%, or ideally 0.05%). Thanks! -Taric
WTF kinda question is this? Do you have a 100 million USD portfolio? If not, why worry? Unless you put in a market order to buy at any price that is offered on the ask, you won't effect the market at all. If you put a limit order all that will happen is that the open interest will increase by 14,784 unless you offer a very nice discounted price. If you are really looking though, I will personally sell you 14,784 "July 2004 Call at a strike price of 20" for T at a mere 3 Million USD. Contact me if you'd like to know where to send out the check and whom to address it to. (This won't effect the market at all!)
===== Do you have a 100 million USD portfolio? If not, why worry? ===== Well, I simply want to leave room for potential. I know some people like to limit themselves, maybe I am overconfident -- maybe I'm a dreamer, but I always aim high. And if I'm one day making trades in the $20 million range I want to know which markets I can trade in now so I can slow down on back-testing the less liquid markets. -Taric
===== If you tried to move that size, the price on the screen is irrelevant ... ===== That makes sense.. I guess what I'm trying to ask is in this case what would be the maximum I could trade without impacting prices? 10 contracts? 100 contracts? 1,000 contracts? Thanks, -Taric
You will be trading your options most likely with Arbs on the other side (who will be trading with you delta neutral against the stock). As such, you should figure out how many shares it would take to move the outright market the max amount that you would like divide that number by the delta of the option and divide by 100 (100 shares for each option). That will give you the answer. As such, it doesn't really matter the open interest or volume traded. You can do as many options as you want against the Arbs and the open interest will continue to increase as long as they can do your options delta neutral and have an edge. Hope that helps..Neal.
Neil, Thanks a lot for the help.. I'm not familiar with delta neutral techniques but just found a great tutortial on the web and am reading it now.. thanks again! -Taric
Delta neutral is a little too simple; try reading about volatility. See what that does to the scenario ...