Nobody is going to trade that way, the example was given to make clear that takers of liquidity have to "pay" the spread; providers of liquidity aka market makers "earn" the spread. If you are still not convinced , let a program buy and sell randomly at market and you will find out that the average trade will converge to - 0.25 = spread Ironically, I had the same impression as you regarding the handle "Cabletrader" http://elitetrader.com/vb/showthread.php?s=&threadid=123085 Apologies accepted.
<i>"the example was given to make clear that takers of liquidity have to "pay" the spread; providers of liquidity aka market makers "earn" the spread."</i> That whole bid/ask spread thing for emini futures specifically, FX included and all relatively liquid instruments in general is nothing more than a red herring. Human logic fixates on what it can control. Trading has a myriad of variables involved. A couple of things we can control are commission = trade costs and bid/ask spread. Traders are human and humans fixate on what's in their control. Brokers play to this emotion, touting their services are lowest cost, tightest spreads, etc. In reality that means much less than many other critical factors. All traders enter and exit wins or losses inside of a greater price range than extreme high to low ticks. The bid/ask spread is absorbed in that process. It's not like someone building a management plan for trade exits at +4pts or +8pts ES needs to factor in the spread. Most times the price swing will be 5+ points to 10+ points in width. The trader exits his trade, pays the round-turn cost <b>but there is no debit from the account for bid/ask spread</b>. That +4pt profit was not +3.75pt profit. It was never intended to be +4.25pt profit. It was 4 points solid. That +8pt profit was not +7.75pt profit. It was never intended to be +8.25pt profit. It was 8 points solid. Traders do not "pay" any bid/ask spread. There is no debit from our accounts for the bid/ask spread. It exists, it needs to be of an acceptable width and once in awhile a trade will turn one tick too soon for our liking. But overall, the bid/ask spread is a non-issue compared to many other factors of much greater importance.
When scalping Bid/Ask spread is very important. A bad execution on ES will cost you 12.5 per contract. Trading more then 100 contract a day is 1250 per day. Why do you think DAX is so popular for scalpers. A "big" contract compared with spread. Traders finally move to ES, ZN, Bund, EuroStoxx50 because of the liquidity they need when trading. Moving 400 contracts when trading DAX is difficult without moving it but easy with ES.
I'm not so sure that the folks at Traders Accounting are correct. While they are of the opinion that the ETF options (SPY, QQQ, DIA, etc.) are subject to the 1256 rules (i.e. 60/40 taxation) others are not that certain. Robert Green (http://www.greencompany.com/) said, in a teleconference recently, that the IRS still has not issued any guidance on the subject. Indeed I just spent a half hour searching the IRS' web site and could find no mention of options on ETFs or ETF based options. Not in Publication 550, not in their revenue bulletins, or in any case law. ThinkorSwim puts the SPYs in the Equity (vice Index) category. I've checked the IRS we site and looked in Publication 550, Internal Revenue Bulletins, case law, and elswhere and can find NO official government document that characterizes ETF options as 1256 contacts. Here's a few links which discuss the subject: -------------------------------------------------------------------------------------- Traders Accounting says YES..................... http://www.tradersaccounting.com/faq_answers.php?id=32 says, in part; "Yes, the options on the QQQ day trading and the other exchange-traded options of index stocks are subject to the provisions of IRS Code Section 1256 broad based index." TradeLog says they don't know. http://www.armencomp.com/options-capital-gains.html Broad-Based Index Options If you trade index options, or other non-equity options such as on bonds, commodities or currencies, the results of a sale are treated differently. For example, options on the SPX, OEX, and NDX are not directly or indirectly related to a specific equity (stock), but are exchange-traded options of index stocks. These are subject to the provisions of IRS Code Section 1256, which states that any gains or losses from the sale of these securities are subject to the 60/40 rule (60% of gains and losses are long-term and 40% are short-term, regardless of how long the securities are held). Non-equity options are usually reported on IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles). Please see our Broker Support page for a complete list of index options marked by TradeLog as section 1256 contracts. There have been many conflicting opinions as to whether QQQQ, DIA, and SPY options should be treated as section 1256 contracts or not. Since these do not settle in cash, as do most section 1256 contracts, some suggest that these are not section 1256 contracts. Others feel that they meet the definition a a "broad-based" index option and therefore can be treated as section 1256 contracts. The IRS is not clear on this, so we defer to the tax professionals, such as Robert A. Green, CPA. On his www.GreenTraderTax.com web site, under the Securities vs. Commodities topic, Green defines these as securities, and not section 1256 contracts. See: Securities vs Commodities under the sub-heading "Securities traders pay higher taxes." As always it is best to contact your tax professional for advice before arbitrarily categorizing your index options trades. -------------------------------------------------------------------------------------- Robert Green (author "The Tax Guide for Traders) says more information of http://www.greencompany.com/EducationCenter/GTTRecSecuritiesVsCommodities.shtml Forget the Rule of Thumb: Give Me a List of Securities, Please OK, letâs just break this down to make it easier. Securities include but are not limited to: Exchange Traded Funds (ETFs) including QQQ, DIA and SPDRs; Stocks, stock options, mutual funds, and bonds; Single stock futures, otherwise known as ânon-dealer securities futures contracts;â By default, any âcapital assetâ that is not otherwise defined as an IRC Section 1256 contract (a commodity) or IRC Section 988 (currencies, inter-bank foreign exchange or FOREX). For example, gold bullion sounds like a commodity or currency, but physical gold is neither included in IRC section 1256 or 988, and itâs taxed like securities. That means if you hold gold bullion bars for more than 12 months, you are entitled the lower long-term capital gains rate (currently 15 percent). The taxability on options on ETFs, where the underlying portfolio or index is broad-based, is currently uncertain and requires guidance from the IRS. -------------------------------------------------------------------------------------- http://mediaserver.thinkorswim.com/transcripts/Jan_25_2006_The_2005_Tax_Report.pdf The Options Clearing Corporation Tax Guide still does not say that the IRS has settled the matter of whether ETFs get equity treatment or index treatment, so we have taken the conservative view and put them in the equity bucket.