Bid and ask price rigged (need help)

[drumzwizard]

Hi,

My question relates to the bid/ask price when trading index options on the XJO. On the 1/7/09, I decided to trade an intraday put option as there had been a big downfall on the DJI and FTSE overnight, hence, the XJO usually follows in the direction of these indexes. I entered a first in the money put option with open interest of 4000 at approximately 10:05AM. After I entered, the index kept falling in the direction predicted, but the bid/ask price did not change from when I first entered the option. I am under the presumption that the bid/ask price must move in your favour if the index moves in the direction predicted? As you can see, it was a massive move on that day but I still came out a loser as the bid/ask price barely increased, despite getting in early before the large move was made. In fact, the bid/ask moved against me despite guessing correctly.

The bid/ask seems to move downwards MUCH quicker when the direction of the index moves against me and its hard to make a profit. On the other hand, when the index moves in the direction predicted it moves barely or slightly. In terms of accuracy, I nearly have a 100% success rate in anticipating which way the index will move, but the bid/ask price does not reflect the direction of the movement, and hence, I am losing money despite my high accuracy rate. It seems to be rigged. Can anyone help?

 

[Cartman]

Re: BID & ASK PRICE RIGGED (need help)

Hi,

My question relates to the bid/ask price when trading index options on the XJO. On the 1/7/09, I decided to trade an intraday put option as there had been a big downfall on the DJI and FTSE overnight, hence, the XJO usually follows in the direction of these indexes. I entered a first in the money put option with open interest of 4000 at approximately 10:05AM. After I entered, the index kept falling in the direction predicted, but the bid/ask price did not change from when I first entered the option. I am under the presumption that the bid/ask price must move in your favour if the index moves in the direction predicted? As you can see, it was a massive move on that day but I still came out a loser as the bid/ask price barely increased, despite getting in early before the large move was made. In fact, the bid/ask moved against me despite guessing correctly.

The bid/ask seems to move downwards MUCH quicker when the direction of the index moves against me and its hard to make a profit. On the other hand, when the index moves in the direction predicted it moves barely or slightly. In terms of accuracy, I nearly have a 100% success rate in anticipating which way the index will move, but the bid/ask price does not reflect the direction of the movement, and hence, I am losing money despite my high accuracy rate. It seems to be rigged. Can anyone help?

forget the ops and trade the index futs !!

 

[skc]

Hi,

My question relates to the bid/ask price when trading index options on the XJO. On the 1/7/09, I decided to trade an intraday put option as there had been a big downfall on the DJI and FTSE overnight, hence, the XJO usually follows in the direction of these indexes. I entered a first in the money put option with open interest of 4000 at approximately 10:05AM. After I entered, the index kept falling in the direction predicted, but the bid/ask price did not change from when I first entered the option. I am under the presumption that the bid/ask price must move in your favour if the index moves in the direction predicted? As you can see, it was a massive move on that day but I still came out a loser as the bid/ask price barely increased, despite getting in early before the large move was made. In fact, the bid/ask moved against me despite guessing correctly.

The bid/ask seems to move downwards MUCH quicker when the direction of the index moves against me and its hard to make a profit. On the other hand, when the index moves in the direction predicted it moves barely or slightly. In terms of accuracy, I nearly have a 100% success rate in anticipating which way the index will move, but the bid/ask price does not reflect the direction of the movement, and hence, I am losing money despite my high accuracy rate. It seems to be rigged. Can anyone help?

Are you serious?

At 10:05am the XJO isn't even fully opened yet! When the D to Z shares open of course the XJO index itself still has a long way to fall. But I'd imagine that the index option bid/ask has already been priced based on what the index futures indicate.

Anyone can have 100% success rate on how the XJO index will move between 10:05 to 10:12 by looking at the US overnight. We'd all be billionaires. If you know nothing about the product and its underlying you should probably do some research before trading them.

 

[skyQuake]

Do research before you trade.. or you will learn after losing $$$

Index options are usually pegged to futures. (leads the index)

Everything was already priced in by 9:50am futs open.

 

[wayneL]

skc and skyquake are bang on the money.

Think about if you took Cartman's suggestion and were trading SPI futures instead of XJO options. Where the index will trade once all stocks have opened at 10:10 or whatever it is, is largely already priced into the futures.

The opening print on the XJO and everything up to when all stocks are open is completely illusory. It's not real. It just a function of the staggered open.

Option market makers, being the cleversides they are, are also privy to this knowledge. They ain't giving away money by pricing the options at an illusory level.

You have to look at the futures.

 

[gooner]

Ain't no such thing as free money, my grandpa used to say. And he was right

 

[Rockon2]

Agree with the others.........

Ask yourself,, who would sell you a short at that price?... ( ie its already factored in )..

IMO forget trading intra day options on the index.. its a mugs game.. ( cept for the writers of course) ... from that go and read up how a writer of
ETO's makes money, and you shall understand.

Index's.. especially intra day are best done on futures or market makers (cfd's) .... and then you have to work most of it at night for the bigger moves imo....

Great game I love it :

 

[skc]

skc and skyquake are bang on the money.

Think about if you took Cartman's suggestion and were trading SPI futures instead of XJO options. Where the index will trade once all stocks have opened at 10:10 or whatever it is, is largely already priced into the futures.

The opening print on the XJO and everything up to when all stocks are open is completely illusory. It's not real. It just a function of the staggered open.

Option market makers, being the cleversides they are, are also privy to this knowledge. They ain't giving away money by pricing the options at an illusory level.

You have to look at the futures.

If this guy has no idea about staggered open - which is in the fundamental newbie must-know 101 category - how can you tell him to listen to Cartman and go trade the index future!

He will become the Kenny to the Cartman - gets killed every episode.

 

[Rockon2]

SKC,, go and read his question again,, its got nothing to do with staggered open...

He cant figure why he gets offered a crappy price when buying a Put Otion on the open....and then when the mkt goes in his predicted direction , his ETO doesnt...

I Repeat... Go and figure how a writer of an ETO makes money... then all shall be revealed

drumwizard, your welcome to PM me for more info.

 

[wayneL]

If this guy has no idea about staggered open - which is in the fundamental newbie must-know 101 category - how can you tell him to listen to Cartman and go trade the index future!

He will become the Kenny to the Cartman - gets killed every episode.

Eh?

I think you should read my post again, viz:

Think about if you took Cartman's suggestion...

This was so that he could understand how the options were being priced in the specific situation i.e. during the staggered open.

 

[wayneL]

SKC,, go and read his question again,, its got nothing to do with staggered open...

He cant figure why he gets offered a crappy price when buying a Put Otion on the open....and then when the mkt goes in his predicted direction , his ETO doesnt...

I Repeat... Go and figure how a writer of an ETO makes money... then all shall be revealed

drumwizard, your welcome to PM me for more info.

Rockon2, The idea of a "public" forum is for there to be questions, answers and discussion in public, for the benefit of all.

As a matter of fact, I would be interested in how you think the writer makes money in the specific situation mentioned.

On another point, the OP seems to be day trading the index options. If so, Cartman's, suggestion is indeed good advice. Even if he is fodder for better traders, he'll lose less, delta for delta, than trading XJO options.

At least he won't be giving up the spread to the market maker on every round trip.

I like options as everybody knows, but they suck for day trading.

 

[skc]

Eh?

I think you should read my post again, viz:

Think about if you took Cartman's suggestion and were trading SPI futures instead of XJO options. Where the index will trade once all stocks have opened at 10:10 or whatever it is, is largely already priced into the futures.
....
You have to look at the futures.

This was so that he could understand how the options were being priced in the specific situation i.e. during the staggered open.

Clearly I mis-interpreted your message. My bad. I just wanted to make sure drumzwizard doesn't just jump head first into another instrument...

SKC,, go and read his question again,, its got nothing to do with staggered open...

He cant figure why he gets offered a crappy price when buying a Put Otion on the open....and then when the mkt goes in his predicted direction , his ETO doesnt...

I Repeat... Go and figure how a writer of an ETO makes money... then all shall be revealed

drumwizard, your welcome to PM me for more info.

I read his question again and arrived at the same conclusion based on the following:

1. The option was bought at 10:05am
2. There was no mention of SPI, just XJO
3. There was no mention of any understanding about option greeks and pricing
4. He believes the XJO must go in the same direction as the US overnight
5. He believes he's almost 100% right
6. He believes the prices are rigged

All these sound like he's quite an amateur so I went for the most rudimentary of possibilities. But there is no point me guessing what the wizard does or doesn't know - let's see if he returns to reveal the answer.

And as Wayne said - it would be great if you can share with us your knowledge.

 

[Rockon2]

Hello skc and WayneL, oh and Drumwizard.
I shall try to answer the questions posed by yourselves.

It seems to me that Drumwizard is making a classic learners mistake.. One that ive made some years ago.. And that is once learning how an oppy basicly works
ie Put / Call.. He then believes he can make money by taking an option early in the day after seeing where overnight markets have moved.....

What he doesnt seem to understand is that the the option writers will only sell him an option at a price based on Privy knowledge as WayenL points out in his post at 2.44 am... In fact they will generally price it lower, in the hope that the taker gets frustrated (as in drumwizards case ) and exits the trade thus making money for the writer...

IMO skyquake said it all in his post at 2.01.... 3 lines...

I was trying to exapnd on it a little more by suggesting he figure out why ( a writer) would sell him an oppy and then not offer any decent market after, for an exit.

 

[Trembling Hand]

What he doesnt seem to understand is that the the option writers will only sell him an option at a price based on Privy knowledge as WayenL points out in his post at 2.44 am... In fact they will generally price it lower, in the hope that the taker gets frustrated (as in drumwizards case ) and exits the trade thus making money for the writer...

Nonsense. They are just priced against the Futs not the XJO. Only games they play are a wider spread at the start of the day.

Privy knowledge good one

 

[Rockon2]

Nonsense. They are just priced against the Futs not the XJO. Only games they play are a wider spread at the start of the day.

Privy knowledge good one

Correct, Trembling Hand,, But its not my quote, its wayneL's ...

 

[cooper1308]

In fact they will generally price it lower, in the hope that the taker gets frustrated (as in drumwizards case ) and exits the trade thus making money for the writer...

Quick question

How many joints did you smoke before making the above statement?

This isn't coles and they don't hold "dollar dazzler" sales to entice buying...

If they were lowering prices below "theoretical" value the "theoretically" we could buy the options at the same time everyday, and make a killing...

 

[Trembling Hand]

Correct, Trembling Hand,, But its not my quote, its wayneL's ...

Its not privy knowledge and I don't think it was Wayne's intention to state it as privy since any punter can get Live SPI data

Oh and by the by,

Index's.. especially intra day are best done on futures or market makers (cfd's) .... and then you have to work most of it at night for the bigger moves imo....

This is just plain wrong!

For the three months of the June SPI the avg range during the Cash hours was 61 points.

The average gap between the day close and open the next was 30 points. As usual for this place BS stated as facts.

 

[jackson8]

hi all

as an observation from watching the options market open and throughout the day i have noticed that early oppie prices seem to be higher in the morning upon the open , given that the sp price may not change much during the day the oppie prices seem lower as the day progresses

could it be that a higher volatility is priced into them on open after a dramatic move overnight , once the market settles the vol may come down

on occasion i have sold puts on open to find that even though the sp at end of day may mirror that of when i took earlier position the price of the opy has decreased.

my point being drumzwizard may have purchased a position with high iv built in which then collasped therefore taking any profit from the position

gary

 

[cooper1308]

hi all

as an observation from watching the options market open and throughout the day i have noticed that early oppie prices seem to be higher in the morning upon the open , given that the sp price may not change much during the day the oppie prices seem lower as the day progresses

could it be that a higher volatility is priced into them on open after a dramatic move overnight , once the market settles the vol may come down

on occasion i have sold puts on open to find that even though the sp at end of day may mirror that of when i took earlier position the price of the opy has decreased.

my point being drumzwizard may have purchased a position with high iv built in which then collasped therefore taking any profit from the position

gary

In this case you are simply short vol...

The issue at hand is Drumwizard has bought a put midway through the open... XJO options are hedged with the SPI, not the XJO which isn't a tradable product. The SPI has already factored in the downward move when it re-opened at 9:50am..

Lets assume BHP opens at $35 at 10am...at 10:25am its now trading at $35.50, can you imagine the response if I ask...."oh oh, can I get it at the 10am price?"

If you have an edge and large enough account I would argue trading the SPI a far better option as opposed to "buying" options... If the spread doesn't kill you it will at least severley dampen performance.