why exchanges keep the option bid-ask so large?

Discussion in 'Trading' started by trend2009, Apr 28, 2011.

  1. the option trading volume is usually low, because it is not suitable for day trading or hft due to the large bid-ask spread. for sina as an example, the bid is 8. and the spread is 8.3, the bid-ask spread is 4%. thus it makes impossible for day traders or scalpers. the question: why does exchanges keep the spread so large? is not that the more trading volume the exchanges receive more commission?
  2. cvds16


    hey, why don't YOU make a market, hearing from the above remarks you will make a fortune ... or blow up (the most likely scenario :D )
  3. 1) SINA is a ~$131/share stock. "Expensive" stocks tend to have wider bid-ask spreads. Arithmetically speaking, they are capable of moving around much more than "cheaper" stocks.
    2) You can "clamp down" the spread if you want to. :cool:
  4. cvds16


    not only it's an expensive stock, it has been quite the mover too ... I am too lazy to look this up but the implied probability is probably way out there. Also normal people don't look at spreads between absolute prices when they look at options (of which you didn't mention the strike or month) but they look at the vol spread which might be really narrow ... but that's impossible for me to calculate without knowledge of the prior.
  5. the official spread is 10 cents. why do not use 1 cent as stocks do? the explanation from exchanges is that each stock has an option chain, and they do not have computing power to handle the activity if the smaller spread is allowed. I think that is excuse, since even for qqqq, only the closest option is active.

  6. NoDoji


    There's a lot of risk to these high flyers like SINA and the spread helps cover that risk for the market makers.

    There are many stocks/ETFs that have option spreads of .01-.05:


    I traded AAPL a lot in the past and the options near the money were always priced with a very tight spread, allowing for some nice leveraged day trading as well as swing trading without paying so much to get in and out.
  7. It's not the exchange. It's the market maker(s). And it's a function of risk.
  8. i think it is the exchange policy of 10 cents spread. the price always sits at 10-cent multiples.
  9. cvds16


    It's obvious you don't know how market making works, if you did you'd know that's not a excuse. They really would have to send millions of quotes for each stock each day if they would be doing that. I am not saying it's not possible considering the evolution of computers but it's not something minor ... (For the record I once was an options market maker)
  10. cvds16


    even if smaller spreads were theoretically allowed by using 1 cent increments, the spread would still be as wide. Really, it's no free lunch out there for market makers, I can assure you, those days are long gone ...
    #10     Apr 28, 2011