I’m trying to figure out how to price and trade options in somewhat illiquid commodities markets (at least the options). The spreads (If a price exists) on screen are ludicrous. A couple questions if you will: 1. I’ve been screwing around with the options platform, but i didn’t see a basic options fair value calculator. I want to take a specific option, and see what the price should be at various implied vols (ideally the hvol and avg ivol are shown there). Isn’t this available somewhere? 2. What’s the best way to execute in an illiquid (or wide on screen spreads)market? I just kept on making a limit order around midpoint and just inching it up but there has to be an easier way. I was trying to do this in a fast market and it was just ridiculous. I’d imagine an algo even detects this behavior and keeps shading higher. thanks in advance
With an illiquid market, the lone market maker will have no incentive to trade with you if you don't pay up beyond midpoint. And with a fast and illiquid market, they will have widened their spreads and will require a higher profit for that trade. Even the most stable liquid ES option want a 1/2 tick out of you. Look around the chain for aggressive bid/asks. * Friends don't let friends trade illiquid commodities.
Re: 1 No, and no one will provide you with iv that is different than derived from the mid price, so you’ll end up back at the mid price. Re: 2 Exactly what you’re doing. You may get the mid once the price moves and it’s no longer the mid. But that’s fine if you simply want to buy those options and account for some slippage, larger in case of futures or anything illiquid. Any other “best way to execute” may involve becoming a market maker and being able to answer the questions you just asked.
I get that i have to pay a premium To fair value, i just don’t want to lift their offer. Isn’t there a midprice or a way to bid based on IV? Also, do you know how to calculate a fair value in The IB platform. It’s seems you can do all these complex things but not the simplest. Thanks for your help.
The IV is based on the mid price, so it's one and the same. And this is the fair value. There is no "other IV", unless you'd have your own pricing model that calculates the price and/or the IV any other way you'd like, but it would be different for everyone calculating it their own way.
I think you should go for tightest spreads instead of wider spreads. This will increase your cost and decrease your profit.
Pricing and executing options when used with wide spreads will create a simultaneous purchase and sale of options for you of the same class and on the same underlying security but with different strike rates and expiry dates. In order to do this process, you have to trade beyond a midpoint level and also require high profit for the respective trade.