Hi, I would like to learn about your experiences with multi-leg trading (2 or 3 legs). What can go wrong, what are the biggest dangers? I'm working on such a strategy, but it requires limit orders somewhere between the Bid and Ask, and depends on it as a whole, ie. all legs have to be filled. The strikes in question are liquid, ie. there is usually enough volume given throughout the whole day. I just wonder about the consequences if not all legs can be filled. What best to do in such a case? Any advice?
RE: "I just wonder about the consequences if not all legs can be filled." How about YOU telling us what the consequences are if not all the legs are filled? Give us some more info on this trade.
You have not told us what asset class you are trading? If it is equity options, many option exchanges have complex order books, COB. You enter the order as one trade at your limit. You can't get legged out. Options on futures have a similar system. On the CME it is called RFQ. 1245
I'm mainly interessted in equity options. Thanks for the info. I really didn't know that there exist a seperate orderbook for such complex orders. But I think I should use the normal order book, not the COB. How can I ensure that my order doesn't land in the COB?
It usually would mean a loss if not all legs can be filled, because even an immediate closing of the filled leg does usually mean a loss due to the spread... I just wanted to see if people have experienced any horror stories due to a not filled leg. But as I learned, most people submit their complex order as a single entity, then it lands in a different orderbook (COB). Due to the specifics of the strategy I'm working on, I think I can't use the COB; I rather have to use the normal orderbook...
I'm not sure why you can't use the COB, but you will consistently get legged out and lose money if you don't trade them as spreads.
Because I'm afraid the MM or the system will immediately see that I'm trying to place a guaranteed winning order... (yes, such guaranteed winning option combinations indeed exist sometimes, and that's my edge I hope. But I admit I haven't tried it out in practice yet; still in the development and testing phase). Yes, I need to trade them as spreads, but using the normal orderbook. So I would need to place the legs as classic single orders, ie. sequentially with some delay between them, so that it gets not interpreted as a complex order wandering into the COB. Or, am I maybe too paranoic?
No, guaranteed winning orders placed as one trade do not exist. Any opportunity would be considered an arb and their are people who are a lot smarter than us with a lot more resources behind them that would scoop it up in milliseconds. Unless you are actually running the trades with live money, your method is not taking in to account slippage. It is why paper traders jump in to trading options with a strategy that has been killing it on sim and find out quickly that the mid price they were automatically getting filled on is an illusion. There are complex order entry systems for multi-leg trades but I find that I am better off legging in with simple verticals. Yes the market can move and I take a loss but that is the cost of business. Unfortunately, there is no free money in trading.
And the newbie with the holy grail arrives just on time.... Trying to enter box spread and think you can lock in a risk free profit over a market maker? Listen to @Dolemite above.
No, I try to avoid the market maker, instead making use of the trades of the non-market-maker traders... Ie. the MM has IMO no control over the bids/offers of the other participants, as there is an orderbook there...