Mid-price for options

Discussion in 'Options' started by Onra, Jan 22, 2018.

  1. Onra


    Hi all,

    I'm new to options and my question is about stockoptions that are thinly traded;
    the spread is often huge and when I buy from my (European) broker I get filled at the Ask. So basically my postion could be 30-40% down immediately...

    US based TastyWorks filled me at a mid price, which changes the whole game...!
    They claim that about 50% of the orders get filled at mid price.
    My European broker assured me they're not that generous :)

    So... is there a difference between brokers and how do professionals deal with this mysterious "mid price" which is not quoted or visible...??
  2. Robert Morse

    Robert Morse Sponsor

    I don’t know what your current broker is doing with your orders, but it is up to you to work your orders with limits to determine what the best price is you can get. Our option orders get posted for the world to see on one of the 15 option exchanges.

    I also think as a novice trader, you should avoid options with wide spreads. The cost to enter and exit is too high. And, any broker that tells you to expect executions all the time at the midpoint is telling you something that is not up to them.
  3. Onra


    Thanks Robert.
    (... to be fair; I said 50% and not: "all the time")

    Do most of your clients work with limit prices somewhere half way between bid & ask?
  4. Robert Morse

    Robert Morse Sponsor

    Even 50% is not a fair expectation. It is a random value that will change from symbol to symbol and how meaningful the midpoint is.

    1-EG-SPY back months. Jan 2020 has wide markets, very little customer order flow but traded on 15 exchanges with many, many market makers monitoring them. For an ATM or OTM option, the midpoint likely represents what they consider fair value at that point in time if there are no customer orders. Any customer orders bettering the MM market, will offset the midpoint. .If you give someone $0.05 of edge to their values, someone will like trade with you.
    2-EG-ITM 1 month out options. The bid might represent a value just under parity. The offer might represent a number that is quite random, but more than the value of the put leaving room not to get picked off, as these have very little activity. The true value might be around $0.05 over parity, but the mid point might be $.40 over parity, No one will buy your options in the middle if you are a seller.

    For any options, you need to look at where the stock is trading, look at the values of the other options and determine where you want to play. Never use market orders with options, Stick with limit orders, Be responsible for finding liquidity.
    iprome and Onra like this.
  5. Is your broker filling the orders, or the market maker? It would be interesting to log into two different brokerage accounts, and see if the bid/ask is meaningfully different.

    I find I get at or near the mid without too much fuss.
    I usually get at or near the mid for my options and stocks without too much fuss.
    Onra likes this.
  6. Robert Morse

    Robert Morse Sponsor

    Brokers don't fill order unless that are also market makers,
  7. Metamega


    Its good to google some topics on market micro structure and payment for order flow so you'll have a better idea of how your orders are working.

    Bid/Ask are placed on lit exchanges, everyone with market access can see these. Your broker is responsible to show you the NBBO (National Best Bid/Offer). If you submit a limit order directly to a lit exchange it will show up on the order book for all with order book access to see.

    If your broker allows you to direct your order directly and you know where that bid/ask resides, you can route your order to that exchange and take that order.

    Most brokers have some sort of routing usually called "smart routing" or something along those lines.

    The brokerage will have partnerships with market making firms to get first access to your orders, in return your brokerage will get a rebate, which they can keep or pass on to their customer.

    So lets say bid/ ask on stock XYZ is 10.00/11.00. You want to buy this stock and you send a market order for 100 shares(contracts, or whatever). They submit your order to their buddies, to see if they want the order. They decide they want the order, to jump the NBBO or lit book, their required to give you a price improvement so they sell it to you at 10.50.

    These firms are also market makers on the lit exchanges so now they can lean on the the bid which is 10 and they just cut their risk on the bid/ask in half. Do this back and forth across multiple orders and your scraping pennies while being completely market neutral.

    Customers happy because they got a better fill. As soon as I ever get any type of price improvement I say to myself " could've probably got a better price with a lower limit" for everyone to see.

    Theirs no reason that I can see to ever use a market order either. I've always used a marketable limit order if I want in right now. Market orders are literally a blank cheque. I'll place a limit order above the best price and if the market doesn't move it'll act like a market order. Markets can move really quick, and you could get filled way outside where you expected.

    Same for stop orders, I always use a stop limit order. Stop price is hit, my limit order is placed in what I can consider a worst case scenario in a fast moving market. If the limit price is below the best bid, it will go as a marketable limit order. Look at the 2015 mini flash crash on the open. Many stop orders we're triggered into a market with no liquidity.

    I simply place an alert on XYZ for my stop price. If I get the alert I check my order to see if it didn't gap past my stop limit.
    iprome and Onra like this.
  8. sle


    Isn’t that technically illegal? As in the MM to be a separate firm with a designated routing, no?
  9. JackRab


    @Onra do you at least try to get it at around the mid price? Because if you just enter a market order it's likely not going to fill at mid. Not sure whether market orders nowadays trigger a quote request either.

    If you trade in thin markets, there are not many market makers that watch it... they don't really care so they will just sit on their current bid/ask.

    Also, on a 10 dollar stock with strikes at 5, 10, 15... and quotes are 0.10 @ 3.50... the midpoint doesn't really mean anything... fair value can be anywhere between it. It's your job as a trader in those illiquid things to justify a certain price based on the theoretical workings of options and your prognoses of implied/future volatility.

    If that goes beyond your scope of options knowledge... you shouldn't trade illiquid stuff.
    Onra likes this.
  10. I would highly suggest getting an Interactive Brokers account.
    Then think about trading USD-denominated options like our SPY ETF with
    Bid to Ask Spreads of .01 to .02 cents.

    Interactive Brokers
    Minimum Per Order
    USD-denominated Options USD 2.00 per contract USD 2.00
    Mini-AEX Options EUR 0.30 per contract EUR 0.30
    All Other EUR 1.50 per contract EUR 1.50
    #10     Jan 25, 2018