Need Option Advice

Discussion in 'Options' started by easyrider, Feb 18, 2002.

  1. As stated on other posts I would like to offset 1 mini contract by buying an appropriate number of options in an emergency. Can one of you tell me what would be my best bet. Can I just buy at the money puts and calls and get back out without too much slippage? I can buy 8 QQQ options for about $25 commission which would be cheap insurance as long as I dont take a beating otherwise. Would appreciate some advice.
  2. IMHO, you should be very careful with slippage. For example, the current spread between QQQ ITM options can be .05 ~ .10 or more depending on market conditions. To be conservative, let's say that you were lucky enough to get into an option position on the QQQs at the ask when the ask is only .05 above the bid. If you were to buy 8 calls/puts then your immediate slippage (provided that you might want to exit right away at the bid) would equal = 8 x .05 x 100 = $40.

    This senario is usually not the case. You will almost certainly lose at least .10 per contract under normal (stagnant) market conditions. If the market is moving significantly volatility will be high (options may be overpriced) and you will encounter an even larger spread between the bid and the ask. As market momentum picks up you will see that people are more willing to take the bid/ask which is what leads to the larger spread.

    I would paper trade or watch the options on the underlying instrument that you intend to use so that you can become more familiar with how they tend to react to market conditions.

    If you haven't already read a good book on options I highly suggest that you find one. Options are complicated. I recommend that you buy a copy of "Option Volatility & Pricing" by Natenberg at for about $30.

    I hope this helps you a little bit. Good luck.
  3. If the futures are moving that fast you are not going to get execution on the options as a hedge or they are going to hold your order and fill it @ the turn, very ugly.

    Paper trading options and using the results as a basis to hedge is extremely risky, you can not gauge execution, and execution risk is the real problem. The DPMs just back away, unless they can quantify the risk and if they can do that you do not want the trade.
  4. Thx for the info. I think I have another solution. I've got 5k I can put into my Datek account and with 4 to 1 daytrading margin I can offset with 800 QQQ with very little slippage. As long as I stick to the NQ this should work ok. I noticed that Globex was "unavailable" for a few minutes this morning on IB.
  5. Just in case you are not aware, if you intend to be long the QQQ hedged with covered calls or long puts as "insurance" you could just buy the calls or puts outright and save on the extra leg(s). In addition, to protect yourself from volatility implodes/explodes spread it off into a simple bull/bear spread.

    Review the synthetic relationships in popular option books by McMillan and Sheldon Natenburg to better familiarize yourself. Just be aware of options bidask spreads and early exercise.

    Hope this helps
  6. Pabst


    Easy: I trade options on QQQ almost daily and the liquidity is unparralled, although StockApprentice"s comments about width of spreads in ITM's was true. If your concern is to hedge NQ against a Globex failure and you are trading through IB then I would go the Datek route and trade the underlying. You should be as, if not more concerned with IB going down than Globex. Have all your bases covered.
  7. I also do not think that you will have a problem getting an execution with QQQ options (assuming that you are trading as a customer and not as a broker dealer or market maker).

    Unlike the other index options (SOX, SPX, OEX, etc), the QQQ are multiply listed on all 5 options exchanges. In addition, since they are on the ISE, I find it hard to believe that all of the option market makers will be using the same option model (i.e., I am assuming that D Bank, Morgan Stanley, Goldman, etc. are all making two sided markets in the QQQ).

    Thus, although I rarely trade the QQQ, I have seen the bid-ask spreads on a consolidated basis no greater than 20 cents. In addition, when the markets are going crazy, I have seen the consolidated bid-ask spread locked.

    The $1 strike prices also help a lot here, too.
  8. I agree that the DPMs are not using the same pricing model, but there lies the problem. They are pretty good at exploiting the crossed/locked rules; If the futures are moving they pump the volatility up in the model causing them to be out of line with each other, typically crossing or locking NBBO, giving them the excuse to take the system off auto, kicking the order to a PAR station, which gives them the time to fill it on the turn.

    If Globex goes down he is trying to hedge an instrument that costs $20 point by giving up at least $.10 spread X 8=$80, plus $25 side commission X 2=$50, total $130, if everything goes his way. The reality is the futures slipped against him, he gets a bad fill on the options, etc. Nice theory, real life execution will kill it.