Options trade during a Crash?

Discussion in 'Options' started by marcoPolo21, Feb 8, 2012.

  1. I was wondering if Options are active during a Crash?

    If one has an option to buy a stock at say 25-50%
    below the normal trade price, and
    the market goes through a severe "correction," such as May 6th, 2010,
    might your order be filled?

    I seem to recall some Stock trades being broken,
    and some being accepted, depending on price I believe.

    marc
     
  2. I was wondering if Options are active during a Crash?

    If one has an option to buy a stock at say 25-50%
    below the normal trade price, and
    the market goes through a severe "correction," such as May 6th, 2010,
    might your order be filled?

    marc

    Unless the drop is mega, options are usually always active. What you will observe though is that there will be wild swings in option prices and the bid ask spread will be wide.

    Doesn't sound like you understand how options work. With an option, until expiration, you have the option, but do not have to execute. The decision is up to you. This assumes you are buying an option.

    What would happen in the case you described above is that if you had way in the money calls and the market dropped so that stock price = strike price on the option - the value of your option would fall.

    Example

    stock = $100
    option to buy at $50 = $55

    stock = $50
    option to buy at $50 = $6

    You would take a big hit in your option position but you would not have to buy the stock.
     
  3. I meant,
    if I have an order in to buy the Option [not the stock]
    25-50% below the normal stock [option] price.

    Maybe that's clearer.

    marc
     

  4. yes it would work like if it were stock. Assuming i read your post correct. If you had an order lets say to buy 1 aapl feb 400 call @1. GTC and the market crashed next tuesday and that feb contract fell to $1 then yes your order would go through, assuming it was a limited order held gtc.


    so yes, if you have an order to buy something and it crashes, unless it gets halted, then your order will go through. why do you ask?
     
  5. The only time I can remember where options were untradeable was the crash of '87. Many B/A spreads were several dollars wide and many option series didn't trade since the MM's just walked away.

    Yes, trade were busted in 2010. The main stock exchanges canceled all trades that transacted 60% above or below the price at 2:40 pm that day. One of the many problems with that was that if you took subsequent action based on the mistaken assumption that you had obtained something at the crash price, you were screwed.

    Placing a deep OTM GTC order for an option could also be a problem. Suppose you place an order to buy deep OTM calls @ $2 but the stock drops 25-50 below your strike. You'll be overpaying severely for a far OTM call and if no bounce and not busted, the likely subsequent IV contraction will eat you alive.
     
  6. options tend to be illiquid during crashes, or trade with significant bid/ask spreads.
     
  7. On May 6th 2010, the SPX pit was trading 12 points wide for front month options (after the selloff and recovery)
     
  8. Right but if it's something that should be worth 10 cts and you have a GTC order in place to buy it at $2 (placed when the UL is 50 pts higher), he'll be buying that $1 x $2 call when the UL is 75 or more pts lower and now deep OTM. Ouch, big time.
     
  9. all great points made re not placing orders to BUY otm options during a crash. this however doesn't apply to SELL orders. say you hold otm puts on xyz and put in a gtc limit sell order for 5x what you paid for them. if you're not near the comp when the mkt crashes you'll have a higher chance of getting filled then manually trying to put the order in.

    if everyone steps away from the mkt like they did during the flash crash and the b/a spread is 1-10 then that's a separate prob which can't be circumvented.

    re thinking you've been filled in a position then taking another position as a result and then being screwed b/c of a bust, the only way to prevent this is to not initiate new trades (buy or sell to open) during this time. by law, all option busts have to occur by EOD that day. this makes sense b/c options clear t+1 so say you make 50x your money during a flash crash, you don't hear about any halt that day, the next day the funds are clear to wire out, you wire them out into your bank account then a week later the brokerage calls you up and says "yeah, um can you transfer all of your money back" then you tell them "is the pope muslim?"