Good day I usually sell calls on high volatility stocks and sometimes i see that some orders executed near the theoretical price but in that moment bid and ask are quite different. Like bid/(my)ask 1.0/2.0 theo val 1.5 and executed on 1.6 I know that cboe route has a possibility to place hidden orders but i suppose that not every route support these kind of orders Could you help with it and tell how i can catch these trades? maybe i should place price a little bit closer to theoretical price or maybe there are some limits on spreads Thanks
Hi dmgi-It is likely that those bids/offers were not hidden. Market makers monitor the market for edge to their values and will only trade with you when they see an edge. It happens so fast at times it looks like there was a hidden order.
Not really. Think of the market as a dark room, where as bid and ask and trades are called out, the participants light up momentarily: • in a loud, crowded market, the marketplace would resemble the old floor of the CBOE -- brightly lit, elbow-to-elbow, gnashing and slashing and markets being made. • in a quiet, low-liquidity market, there would be a pop here, and twinkle there, and darkness in between. That's about it. No magic. Just fireflies...
Thanks, but i supposed that in this case level2 should changed for a while, but bid/ask were unchanged in the moment of execution and before that Also i founded regulators documentation and there was something about spread limits like if spread more than 1.0 than marketable order will fill with a range 0.2-0.4 above bid or something like that, so you can't buy for the ask price, but actually i checked it and it doesn't work.
There a lot of reasons a market maker won't display their best bid/offer. One of the reasons is they will be joined by many other MM's and they will not have any advantage. So if a market is 1-2 , the MM's may prefer to examine the order when it comes in. When you enter an order to buy at 1.6 at the CBOE, ( on a 1 -2 market) it goes into a type of auction (AIM Automated improvement mechanism) MM's will see your order to buy and may fill it there or even improve your order. These are not "hidden" orders. The whole time the quote will stay 1 -2. The only way to know the "real" market is to send actual orders and see where they are filled.
Thanks guys, very useful info! Could you recommend something else to read about executions on options (fastest routes, rebates, etc.)? Or it better to go on Execution Topic on this forum?
I assume you are a newbie retail like me. If so, trying to profit from $0.1 per share per trade, even if you trade 100s of contracts at a time, is a tough way to make a living IMHO. It is hard to compete against MM and HFT doing that. Someone here told me once we amateur retails trading options is like bringing a knife to a gun fight where our opponents all have machine guns. If my assumption is wrong, my apology and you can disregard this post.
A book could be written on this topic. To me it is more of an art then a science. When trading less liquid options, working an execution will make you far more money then a zero commission broker will save you. Typically I will start with a 1 lot routed to the CBOE. I have found the generally they will give me the best fills. Say a call option is quoted at 1-2. I wouldn't assume the mid point is fair price, I would first look at the strikes around it. For example if the strike just below is quoted 1-1.6, you would know that the mid price of your strike is too high. If this is the case, and I wanted to buy the option, I would first put in a 1.10 bid and wait a couple of seconds then cancel. I would then go up slowly until filled If you are trading with a broker that passes on rebates for adding liquidity like mine, I would then send the next order to an exchange that gives a good rebate (I generally have the most success with the EDGX exchange) I use the same price that I was filled on the CBOE. Sometimes I am filled sometimes not. Note that often you are filled on smaller sizes. So if you want to buy 20 calls, you may not be filled on a 20 lot at the best price, but if you enter 5 different 4 lot trades you will be filled.
Thank you, FSU It's very helpful to me. Also, I usually prefer to calculate theoretical price on ivolatility and make some adjustments on volatility before placing an order Do you use this kind of services? Or maybe you can recommend something like that