Discussion in 'Options' started by Mispe, Dec 12, 2002.
I completely agree here. That is exactly the way one should think about, since a market in an option is basically a market in volatility.
If you consider the BKX index, the Jan 750 calls are 2.00 wide (on a 0.90 vega, that's 2.2 vols wide). That corresponds to a 0.20 wide market on a 75 strike/stock, and 0.02 on a 7.50 stock.
As a comparison, GS Jan 75 calls are 0.15 wide, and EP Jan 7.5 calls are 0.15 wide as well.
Now, I know EP's vol is probably significantly higher so it's not quite as easily comparable. But the $2 wide market in BKX, a basket of 26 stocks, which is relatively illiquid and thus not quite easy to hedge, seems quite a fair proposition here and should be seen as an attractive spread.
Just a quick comment on the width of options spreads. I'm a market maker on the cboe, and spreads have become ridiculously narrow. With the emergence of the ise, and competition between the existing exchanges, you will often see markets a nickle wide...if not pickem. On the cboe, we honor the nbbo, so even if our market is 2.10 - 2.25, if the phlx is 2.20 - 2.35, and the pcoast is 2.05 - 2.20. Then our market is now 2.20 pickem. And yes we will trade on these markets, we either trade these markets or have to "go away" to the other markets to have them either trade or fade their markets. So a lot of the time for smaller customer orders, 50 lots or less, we will simply trade it on the locked market. Then their is the issue of spreads (put,call,butterflies,risk reversals etc.), virtually all are traded at almost exactly fair value. A broker will come into the crowd with a spread, and will want to cross it at fair value. If you trade size, and are not trading well within the bid/ask on spreads, you need to get a better broker. The markets are so competitive now, that the customer definitely has leverage and opportunity. If you are not taking advantage, you need to educate yourselves. I'm not saying that mm's don't have advantages..but they are shrinking and are mainly against the "weak hands" which have been for the most part washed out. I actually am considering leaving the floor in the near future, to take advantage of the favorable customer conditions in the option markets, there are even arbitrage opportunities still available, although not as easy as in the past. This post is not meant to be bitter, just to give you a view from the other side of the fence.
Are there any plans for the CBOE to allow BD ordes to trade against the customer order book? (ABP- Automated Book Priority)
BD's are already allowed to do this, not electronically. They must send a broker into the crowd. However some dpm's are already allowing electronic raes access to bd's, one example is Timber Hill's dpm, allows bd's access in Merrill lynch 250 up.
The CBOE recently approved a rule that would allow electronic access (RAES) to BD's for the top 175 equity options. However, BD orders will not automatically execute against the resting order book. However, customer to customer orders will be executed electronically (ABP).
My question is, do you know if the CBOE plans on allowing BD 's electronic access to their customer order book?
As a comparison:
The ISE will shortly have a rule in place that will treat all BD orders the same as customer orders. The BOX will not discrminate agaist BD orders and the PHLX has plans to allow B/D to customer orders access via their AUTO-X system.
here is the rule:
Date: November 22, 2002 Regulatory Circular RG02-103
To: Members and Member Organizations
From: Trading Operations
Re: RAES for BD Orders in Equity Classes
On September 18, 2002, the Board of Directors approved automatic execution of certain types of BD orders (i.e., orders designated by origin codes âBDâ and âFâ) via RAES. On October 28, eligible BD orders were given access to RAES in the 25 most active CBOE issues and, on November 18, access was extended to the 50 most active issues. Effective November 25, eligible BDs will have RAES access in the 100 most active classes (listed below), subject to the following requirements:
1) Orders for the accounts of CBOE market makers (origin code âMâ), market makers on any exchange other than the CBOE (origin code âNâ), and underlying stock specialists (origin code âYâ) will NOT be eligible for automatic execution.
2) The RAES eligible order size for eligible BD orders shall be 20 contracts. When the disseminated autoquote size is less than 20 contracts, RAES-eligible BD orders may automatically execute up to the lesser of the order size (which may not exceed 20 contracts) or the disseminated autoquote size.
3) BD orders will not automatically execute when a manually-entered quote exists (same as for customer orders).
4) BD orders will not automatically execute against resting book orders (no ABP) and instead will route to BART.
5) BD orders will not automatically execute when CBOE is not the NBBO (no automatic step-up). NBBO rejects will route to PAR.
6) BD orders will not automatically execute when the CBOE quote is inverted with another exchangeâs quote (same as for customer orders).
7) BD orders will not be eligible for automatic execution in LEAPS.
8) BD orders, other than NBBO rejects, will not route to PAR and will instead route to BART if not automatically executed.
Top 100 (effective Nov 25, 2002): Includes Top 50 plus: CPN, S, MWD, PG, HSY, FLEX, NVLS, HRC, ADRX, MCD, GLW, EDS, BBY, FNM, CMCSK, NEM, HI, AMZN, HAL, DAL, NOC, CCU, JDSU, SBUX, XLNX, GPS, LOW, WFC, AMD, BA, BGEN, EK, VIA-B, MOT, LLY, ACF, PSFT, COF, AAPL, QLGC, PHA, CD, AZN, UTX, AXP, HRB, ONE, LEH, XRX, DUK.
Top 50 (effective Nov 18): Includes Top 25 plus: AMGN; F; MO; EP; MRK; MMM; YHOO; BMY; GS; EMC; UAL; T; KLAC; AIG; UPS; EBAY; NOK; SUNW; MER; NXTL; KO; HPQ; COX; PEP; BRCM.
Top 25 CBOE (effective Oct 28): GE; MSFT; C; TYC; AOL; CSCO; IBM; INTC; DELL; ORCL; JPM; WMT; QCOM; JNJ; GM; BAC; XOM; PFE; TXN; HD; AMAT; SEBL; MU; VZ; SMH.
the wonderful world of options rules..
What service do you get this stuff from? I always hear about it early; but you seem to have the text of the rule first.
Did you ever find the PHLX two minute rule?
I have some contacts at each Exchange.
for detailed rule proposals, search each rule via the Federal Registry
mainly hard work.
and I don't recall seeing "text" of the two minute rule but I'm certainly aware of it.
Do you trade as a BD or as a customer?
(BTW, look for auto executions for client to client trading on the PHLX very soon)
Separate names with a comma.