Options Spread Orders Execution

Discussion in 'Options' started by dragonman, Dec 24, 2011.

  1. Is it reasonable to assume that it may be more difficult to get a fill on a spread order (such as vertical spread) at the mid price than to get a fill on a single order (i.e., call or put) at the mid price?

    I assume that spread orders are often executed by using implied pricing functionality, so that there is no actually a single party that trades the opposite spread at the same time but the exchanges may fill the spread order against several single orders that in aggregate fit to the spread limit price.

    Therefore, there are more parameters that have to occur simultaneously when trying to trade a spread order at the mid price than when trying to trade a single order at the mid price and thus I am afraid that it may reduce the chances of execution at the desired price. Also, I guess that the more legs a spread have the more difficult it is to get a fill at the mid price (so that it may be difficult to get a fill on an iron condor versus a vertical spread, for example).

    Also, if I trade single orders and place a trade at the mid price it may be published as the NBBO (as opposed to spread order which does not get to the exchange bid/ask quotes) and the market makers may be interested to fill my order so that the NBBO will continue to be their wide bid/ask quotes. It is true that market makers sometimes may be willing to trade spread orders over single orders since it may be easier for them to hedge their deltas, but if they have to trade such spread at the mid price (and not at their quoted bid/ask) I am not sure they will have an incentive to trade spreads over single orders due to this reason.

    I would appreciate if you let me know whether my logic is correct. I trade spread orders on long-term options and since I try to trade them at the mid price I find out that the execution is very arbitrary (although I have patience and I try to work my orders over a few days). I want to understand if it is indeed more difficult to trade spreads at the mid price (as opposed to single orders) or I may be doing something incorrect here. Thanks!
  2. rmorse

    rmorse ET Sponsor

    Orders entered into the Complex Order Book (COB), are sent to one exchange and keep there for execution. They are NOT sent to the individual legs for execution. You need a customer or market maker to execute the other side of the spread, to get an execution, in the COB.

    Many of the big market makers run their own vol skews. The mid point means nothing to them. They could be buyers just above the midpoint, and sellers just below. On wide markets, they have no vested interest in the legs to make the markets tighter. And, when a customer order comes in to better their bid on a leg, that does not mean they will bid higher on the spread.

    If you want to get spreads done and don't care about one or two pennies, start at the mid point and "walk" your order up or down until you get an execution. They use what some call an electronic eye, looking for value. If you bid or offer at a price their program see value, you'll get an execution. If a customer order come in at that exchange, you'll get an execution. If a customer order comes in at a different exchange, even at a better price, you might not.

    I hope this helps,

  3. I did not understand from your answer if there is a better chance to get fills at the mid price on single orders vs. spread orders. Could you please elaborate on this? Thanks.
  4. I've gotten instantaneous fills while buying in complex spreads at the mid. I don't have a well-educated reason for why that is, but it doesn't happen terribly often. I typically start at the mid and adjust $0.05 at a time until I get a fill. I'd say it's pretty common for me to get filled within $0.20 of the mid price on SPX, but I'm usually only doing 2-lots. I'm also pretty patient when selling volatility.
  5. rmorse

    rmorse ET Sponsor

    If you use single orders, you can get legged on one side. Stick with spread orders unless your comfortable legging into spreads. You'll never know where the other side is willing to play unless you enter an order out there. You have to decide what your price is and wait for it.
  6. rmorse

    rmorse ET Sponsor

    That sounds like what I recommended. Never do a trade to open past what your will to trade at, but start a one price then slowly move to you limit.
  7. I didn't ask about legging into spreads. Assuming that I can acheive my profit targets by using either spreads or single orders (without legging in) I want to understand which one, spread order as such or single order as such, has better chances over the other of getting filled more quickly and at a good price (mid).
  8. rmorse

    rmorse ET Sponsor

    I don't understand what you mean by single order. The choice is complex order or enter two single orders to leg a spread. What are you asking?
  9. I am asking which order has better chances over the other (if any) of getting filled more quickly and at the mid price: a spread order (such as a vertical spread) or a single order (only call option, not as part of a spread order)? I hope now its clear.

    Basically I want to understand if market makers have generally any preference to trade spreads and not single orders (or vice versa) or if there is any other parameters that can cause the execution chances of one of these two choices to be superior to the other. And again, by "single" I mean just trading call option, not trying to leg into a spread. So the choices are vertical spread vs. a plain call option. If my question still is not clear please let me know.
  10. rmorse

    rmorse ET Sponsor

    You have a better chance of executing an order at the mid point with a single order. With a single order, everyone can see it. Your order is protected by best execution rules, so no trade throughs. In the COB, very few firms and traders can see the order, few platforms display it. The individual legs can trade through your limit all day.

    Complete transpancy with single orders vs a small group of broker dealers and traders with the COB.
    #10     Dec 25, 2011