Synthetic straddles on pit traded futures contracts?

Discussion in 'Options' started by steve3052, Apr 16, 2008.

  1. I'm curious as to how to get good straddle fills on futures options, and my experience thus far with equities and ETFs leads me to believe that legging into synthetics can often be preferable to limit orders. I was hoping to get some input or advice on whether a similar situation might exist for open outcry futures options.

    My derivatives trading experience thus far has been almost exclusively with equity options, as well as a limited amount with electronically traded futures/options. I mainly put on non-directional volatility trades around events such as earnings, FOMC meetings, etc. - usually initiating the trade with a straddle or synthetic straddle and then hedging via positive or negative gamma scalping, although the hedging interval can be much wider than what a lot of people would probably consider gamma scalping.

    Since getting a PM account, I’ve been leaning toward synthetic straddles, as they seem to result in the best fills. I really like IB’s ‘vol’ order with dynamic updating and automatic delta hedging, which basically does this:

    “Volatility order …allows you to trade volatility instead of price. TWS calculates the limit price of an option as the function of the option's implied volatility. You specify the option volatility, and TWS calculates the limit price for you. … the bid and ask values are displayed as volatility instead of price. You can also enable dynamic management of these volatility orders, where TWS updates the limit price based on movement in the underlying price, cancels the order if the underlying price moves outside a high or low price range, and transmits a delta trade for the underlying when the volatility order executes or partially executes.”

    I'd like to do a similar type of trading, although less event based, with futures options in the following markets:

    Crude Oil
    Live Cattle
    Swiss Franc or Euro FX
    T-Bonds (or maybe 10 yr T-Note)

    Of these, the currencies, and possibly bonds, seem to have active electronic markets which I can trade with IB, but the rest are outcry. Grain options just started trading alongside the pit during day, but I’m not sure if the spreads will become attractive.

    Ideally, I want to be able to write straddles that are within 1% of the mark. I'm normally not in a rush, as my tentative time frame is 8 weeks on avg, so I don't mind waiting several hours for a good fill if necessary. In an ideal world I'd give the broker a volatility order as described above, such as:

    “Sell 2 (4/6/8 etc) ATM puts or calls for at least X% volatility, then immediately hedge with 1 (2/3/4 etc) futures contracts at the market.”

    Somehow, I find it highly doubtful this will be possible, so the next best thing would be something like:

    “Wait for someone to offer to buy an ATM put or call at the mark, sell them 2 and hedge with 1 spot at market.”

    Of my current brokerage accounts (IB, TOS, OptionsXpress) only OX offers pit traded futures options, but they don't have an order type which supports synthetic straddles. It doesn't seem feasible to use two separate orders due to the delay between the fill of the short option and notification - market will likely have moved significantly by the time I get my hedge in.

    At this point, I'm seeking general advice, as pit traded options seem pretty scary to me after being used to watching the electronic markets on stocks in real time. Calling a broker and waiting several minutes for them to get a quote on one strike from the floor feels really bizarre!

    Also hoping for answers to the following specific questions:

    1. Is there an open outcry futures option order roughly equivalent to IB’s volatility order?
    2. If so, which brokers provide this type of order, or can accomplish it informally given verbal instruction?
    3. Does anyone else trade this way and, if so, would you care to recommend a broker you've had success with?

    Once I understand any tricks to getting good fills, such as the best times during the sessions to trade etc., I don't think I'll need too much in the way of research, handholding, and the like. I get my vol data from and the hedging is purely mechanical via stop orders on the underlying. Basically, just need great fills, low commish, decent interest on margin collateral and credit balances, reasonable rate on debit balances and, of course, account safety.

    Many thanks for any input!

  2. ib does have pit futures options (spx and ndx on cme are the two i've traded before). but i don't know why you want to trade them. the liquidity absolutely sucks and you have to guess the bid/ask because most contracts aren't quoted.

    you can guestimate the b/a by looking at comparable electronic fo's and index options if you really really wanna trade them. or call your trade desk.

    i haven't traded them for a while now. i see no advantage to them over index options or electronic fo's.
  3. If you have access to IB's floor brokerage you can just quote the straddle and they'll make you a much tighter price live. Or quote the put or call with the future at the same time and they'll make you essentially a volatility market. You can agree on exact number of futures for the delta you give the put or call.
  4. Thanks for the response, blackjack. Yes, IB does have some pit futures options, but from what I can tell the only ones I can trade are those that have side-by-side electronic markets. I never traded anything on IB other than using TWS, and was told by chat personnel that they only supported futures options that trade electronically. However, maybe I misunderstood-maybe they meant through TWS.

    Are you saying that if I actually call in I'll be able to get access to the floors?

    Also I believe they charge $30 for telephone orders, which would start to add up pretty quick!

    From the website, re CBOT/ECBOT:
    “Only electronically traded products are available.”

    Also, they don't show any product availability for options on the NY markets.

    That sounds perfect - thanks for the advice!

    How do I get access to IB’s floor brokerage as an individual? I didn't see anything about this on their site.

    Are they represented on all the major domestic futures exchange floors?
  5. They're on every floor. Contact IB, I am not an IB client but I know they provide that service.
  6. Will do - appreciate the info, xflat!
  7. Opened a ticket, then my ADD kicked in and I called them. No NY FOPs!

    Here's the ticket:

    Ref# T823949
    Date/Time 2008/04/17 12:50:33
    Status LV1
    Summary Open outcry futures options

    Date/Time Sender Comment
    12:50:33 steve037 I was hoping to get some information about floor brokerage services that IB provides, and whether they can be made available to individual accounts. According to the website, IB currently only offers futures options that are traded electronically - if I understand correctly.

    I would like to trade some FOPS on the NY markets - softs, energy, metals - as well as grains. Being under the impression that I could not do this in my IB account, I posted at seeking advice on pit traded futures options brokers. There is a gentleman there that seems relatively sure that you provide that service - here is a link to the thread in case you're interested: http://www.elitetrader .com/vb/showthread.php?s=&postid=1887445#post1887445

    I thought I'd ask for clarification before I spent too much time spinning my wheels opening another brokerage account!

    Thanks for your help,
    13:04:39 IBCS Thank you for your inquiry.

    I believe I spoke with today by telephone. As per our conversation, options on futures on nybot for crude oil and coffee are not available for trading electronically nor floor based.
  8. dmo


    If you like, you can specify, for example, "I'll buy 20 1300 calls at 27 and sell 10 futures at 1300. Do it as a spread." The guys in the pit love such orders - it's one-stop shopping for them, as they tend to delta-hedge in the futures each time they buy or sell options anyway. But I'm not sure why that's preferable to simply putting in a bid for 10 1300 straddles.
  9. My guess is that, if the trade is made with the market makers, they probably wouldn't provide any tighter market for the synthetic straddle. Just thought that, based on what I’ve observed with equity options, if you’re willing to become one side of the market, where your price is continuously updated and is slightly better than what the MMs provide, you can pretty much sell at the offer or buy at the bid and then immediately hedge, whereas your limit straddle order may sit there much longer or not be filled at all.

    Also, I have noticed that if I ask for markets for the put and call separately rather than for the straddle, the contract that is slightly OTM seems to often have a tighter spread than the side slightly ITM side. I don’t have enough data points to believe that’s generally true, and would be interested to hear if others have seen the same thing.

    I’ve never asked for a market which combines options and spot as you suggested. Anyone have better results with this than straddles?
  10. dmo


    In the more liquid contracts, that strategy may work. I think the otm options have a tighter spread than the atm or itm options because their delta is smaller.
    #10     Apr 19, 2008