There are dozens (actually I suspect thousands) of online brokers out there. They all offer the same product, competing with each other in small insignificant details. This stuff, an electronic exchange for capped options and CFDs, could be a game changer. I know I'd immediately abandon the exchange-traded dangerous crap and go for the capped one. Because my risk is limited (and deterministic), I can greatly increase volume and profit from the increased turnover. The main problem as I see it is marketing. Having counterparts for my trades. That's why I'm asking if you would be interested in buying / selling such stuff. If so, until we find a broker who has this, I can put up online some simulator for this stuff and see how cool it is.
How much are you willing to pay for this "ease of use"? I am happy to offer you "OTC" liquidity in whatever capped concoctions your heart desires. You might not like my pricing, though .
The pricing of options changes fundamentally but the actual price of around-the-money options stays pretty much the same. Only long tails and the impossibility of predicting that would effectively disappear.
>> How much are you willing to pay for this "ease of use"? I'd pay just like I do now: commission per trade. Right now with IB I'm paying $5 for executed order and nothing for just quoting / requoting / cancelling orders. Commissions are obviously negotiable on volume.
I'm trying to keep this simple, because it's very difficult without a real conversation to explain. Yes I work for lightspeed, a broker, but I was a Trader first for many many years. You seem to think that someone else will be willing to cap your losses in a transaction without some cost or manner for which they get paid for the transfer of risk. That seems unreasonable to me.
And, OTM calls in equity/index options are often priced on a lower skew so the cost of hedging that way is your best option unless the product has no options.
@Robert Morse: >> I'm trying to keep this simple, because it's very difficult without a real conversation to explain. Yes I work for lightspeed, a broker, but I was a Trader first for many many years. >> You seem to think that someone else will be willing to cap your losses in a transaction without some cost or manner for which they get paid for the transfer of risk. That seems unreasonable to me. There's no transfer of risk. It's a broker who offers an exchange for two types of products: 1) OTC futures, *cash* settled. 2) OTC options, *cash* settled. The cash settlement is essential, you can't have this kind of capping with physical delivery. Let's see how a capped OTC future works, to see there's no transfer of risk. Say current spot price of the underlier (GM) it's $50 and the ATM vol is 30%. The future expiration is in one month. Two standard deviations around spot is then about $10, so the cap is +/- $10 around strike price. I'm a seller of future and sell it at a strike price of $50. There's another trader who buys this future at the strike price of $50. Contract size is 100, settlement is cash. Consider two situations: 1) At expiry, after a month, the spot price of GM is $278. The OTC future contract however it's only worth $10 = max(spot - strike, $10). Contract size is 100, so I'm losing $1000 from my account and the trader who bot the option wins $1000 in his account. No transfer of risk: the broker/exchange get their $5 or whatever comission, they are always profitable. On a regular exchange-traded contract, I would have lost (spot - strike) * 100 = $22800. I think you're thinking of this kind of risk, which lurks with current contracts. In this case the broker has to take the hit then recover his losses from me. But with the OTC product there's *zero* risk. For all I care the broker may *require* the margin deposit to be $1000 and I'd deposit it. Zero, absolutely nada risk for the broker. Just for me, but it's my decision. 2) At expiry, after a month, the spot price of GM is $7. The OTC future contract however it's only worth $10 = max(strike - spot, $10). In this case I'm getting $1000 from the account of the trader who bought the future, and he loses $1000. Unlike on an exchange traded product where he would have lost $4300. Zero risk for the broker and I haven't bankrupted the other guy. Nor, in case of a reverse situation, would I have a claim for $22800 from him. Just $1000, as the contract stipulates.
No, you misunderstand... I am not referring to the commissions element of pricing, but rather the pricing of the instruments themselves. I am happy to give you an example, using the underlying of your choosing.
>> @Martinghoul: I am happy to give you an example, using the underlying of your choosing. I'd like to see your example on the cash-settled OTC future example I gave above.
Sure, but before we do that, I have a question... So let's imagine your "capped/floored" futures are trading in the mkt alongside "normal" futures. Let's also imagine that the normal futures contract is trading at $50. Imagine you're the mkt-maker. Where should the "capped/floored" futures contract be priced?