SPX b/o spread size- a real question about "THEY"

Discussion in 'Options' started by resinate, Oct 27, 2003.

  1. This might not be the answer you are looking for, but based on previous experience with index options I can tell you that it was never uncommon for the spreads to widen during times of increased volatility. Obviously with a VIX as low as it is now, most people would not think that there is much volatility in the market, nevertheless we had a noticeable short term spike in volatility over the past week or so and some "faster" market conditions during that time as well. Back in 2000, when I traded the OEX more actively, the spreads would widen a bit even though they were mainly dime wide markets and very liquid three years ago. My assumption is that they need to widen their markets to hit their hedges in the ES/SP and if that market is moving faster than usual, then the customer is the one who takes on the extra risk in the form of a higher vig.

    Also, another consideration is the fact that with implied volatility as low as it is, there is alot of fear in the market about a sudden, sharp and permanent increase in volatility and the event risk last week was enormous. Remember, it was this week in 1997, after a rather benign October expiration, that the great black swan event occurred on 10/27/97 when the indicies dropped like a rock and Victor Neiderhoffer was liquidated, only to see the indicies return to former highs by mid-November.

    #11     Oct 29, 2003
  2. "They" are some of "they", not all of "they". "They" do more than these "they" do. There are "they" doing more devil acts than these "they" do. This is "they"'s industry.
    #12     Oct 29, 2003
  3. vega


    Couple of quick things about the primary MM in the SPX--THERE IS NONE (at least as of last year). With that pit (unlike the equities), the trading firm responsible for maintaining the autoquote changes weekly (Wolverine one week, Chicago Trading Company the next), so I suppose it's possible that the firms doing the autoquote lately have been using wider spreads, but I think it's probably something else. Next, have you noticed if the larger priced options have had the spread increased also ??? It's possible that "paper" has been accumulating "little puts and calls" in size lately, and the MMs are just trying to give themselves a little more edge in the trades. Hope this help, feel free to fire away with more questions.


    Welcome back NOMORE:p
    #13     Oct 29, 2003
  4. Vulture and Vega,

    Thanks for your informative replies.

    What you point out is interesting. The vix has been down for quite a while but this is the first time I have noticed the spreads staying wider like this. While I do not watch the more expensive spx contracts as closely, I have not noticed any changes in their quoting- further leading credence to the idea that THEY are concerned about a big move. And, if I understand right, what you (vega) point out about the primary mms being a firm not individuals, means that this in not merely one particular trader's anxieties. Funds hedging would not, in itself, produce this effect. Right?

    Related and also interesting, is the recent appearance of very confident naked strangle sellers on the ET boards. hmmm
    #14     Oct 29, 2003
  5. vega


    Is that if you were to look at the volume for the smaller options recently vs what they had been like the previous few months, you may notice an increase in the amount trading, and thus the wider spreads (coupled with vol being low and people not thrilled about selling a ton of options cheap). One other thing to note, is that every DPM on every option trading pit (maybe not ISE, but probably) is run by a firm, not just one individual. True, there is one head trader that is probably setting up the autoquote, but most DPMs are the larger floor firms, and seeing how these firms have traders across the floor, it's probably NOT just one guy getting a little nervous as he is probably hearing the same thing about action in different pits.

    #15     Oct 29, 2003
  6. white17


    Resinate; Are you seeing this increased spread in both puts & calls?
    #16     Oct 30, 2003
  7. Yes, I see it in both.
    #17     Oct 30, 2003
  8. white17


    All I can think is that THEY are expecting vol to increase and are taking in some extra premium to offset the risk.
    #18     Oct 30, 2003
  9. ====================
    Fun read on quote & auto quote, Vega.

    For partial disclosure purposes OIC has answered some respectful questions toll free;
    did put up thier 2 year calender .


    Most businesses including contract type businesses try to maintain profits or raise profits with rising demand;

    besides that better insurance companies have to call in figures for a 500 year flood.

    Wouldnt know what happens to a BOX turtle in a flood.
    #19     Oct 30, 2003
  10. Wonder if any of you are actively trading the spx options recently?

    The spread widths hit unprecedented magnitude today. For example at 2:16 Et., the march 1100 put was quoted by the auto quote MM at 5.4 x7.8. Now that is a 240$ spread and it was like that most of the time and for most spx options if no outside orders or other MMs were trading.

    Since I originally started this thread, I researched the max allowable width for spx quotes. They are allowed 4x the regular b/o width. So, for the 1100, and other options priced between 5 and 10, the max allowable is 4 x .80 or 320$.

    Man, what an edge.......

    Edit, just reread the rule- the max for 5-10 is .50.... So .50 x 4 is 2.00, not 3.20 as I said above.
    #20     Mar 15, 2004