Growing pains

[Fox]

... to inefficiency of dynamic hedging such a small profit zone.

Thanks Mazza/Wayne. Your views noted and much appreciated.

I was focusing too much on the "low prob" aspect of the fly and losing sight of the inefficiencies (I presume you mean contest risk, fees, etc). I'll experiment with a bigger profit zone in my next attempt.

Girls are wrong when that say size does not matter, especially when used efficiently . No more fly envy from now onwards. Mine will be as big as Mazza and Wayne's :casanova:.

 

[Fox]

I tried modelling the 25/30/35 and compared it with a 22/30/32 when the spot is at 30 with 6 weeks to expiry. I will refer to the 25/30/35 as Wide Fly (WF) and the 22/30/32 as the Narrow Fly (NF).

I can see that adjusting WF for delta neutrality will be easier than NF. To my inexperienced eyes, the gains in the profit zone appears incremental, whereas the risk to reward (R/R) ratio of WF is not as good as the NF. What other benefits of WF am I not seeing?

If the WF and NF were initiated as longer term spreads, say 6 months to expiry, the gains in WF's profit zone would of course be much larger. The R/R differences differences between WF and NF will be reduced. Could that be the point I am missing? ie. that WFs with longer time to expiry are the way to go?

 

[mazzatelli]

It's been a long time since I have looked at Oz options, but with only ~ $1.40 juice in the 29 WOW Straddle - I personally wouldn't hold the fly for a bet on distribution.

I'd imagine it would be like GE [pre GFC, lol]

In terms of time to expiry 40<x<12 days. Otherwise too much sensitivity to vegas/gammas than desired, IMO

 

[cutz]

Hi Mazza,

I guess what you're saying is flys aren't ideal in the current low IV situation, i'm sort of coming across the same thing on index series.

What are you're thoughts on trading the options on stocks you know nothing about, for instance would you just be comfortable knowing the price history of the underlying and option stats ?

 

[Fox]

I guess what you're saying is flys aren't ideal in the current low IV situation ...

Cutz, I think you may have answered my question in my earlier post. I tweaked the IV up from 17% to 40%, and WF (blue) looks much more attractive. Thanks Cutz.

 

[cutz]

Hi Fox,

That fly you have on is short volatility, these days the opposite trade looks more attractive, and you can even put the natural on for credit.

 

[mazzatelli]

What are you're thoughts on trading the options on stocks you know nothing about, for instance would you just be comfortable knowing the price history of the underlying and option stats ?

Yes; historical price + iv [adj] to model vol time series. My 'edge' is in vol forecasting.
In essence - quantitative understanding of stock rather than fundamentals, though I do have sector analysis and custom indices for relative strength.
Earnings, FDA approvals etc obviously handled differently

 

[sails]

Bungle #6 Human error

I attempted to buy an iron butterfly (IB) today for a $1.14, using Interactive Broker's TWS. This was a credit trade ie. I was to receive $1.14 for this trade. I was careful to preview my order to ensure that it was indeed a credit trade. IB's convention is that if you bought a spread for a credit, the price of the spread is shown as a negative price. I verified that it was -$1.14. I then transmitted the order. So far so good.

I then decided to change my price for a better credit of -$1.16 and wait for a fill. I clicked on the price field and must have hit the backspace key all the way to the left, when I should have stopped at the minus sign. So I entered $1.16 instead of -$1.16 and hit the transmit button. To be honest, I'm still unsure that I actually made this mistake, but the audit trail suggests that I did.

It was an instant fill, much to my surprise. Fear set in. This is really turning into a nightmare. I checked my invoice and to my horror, it was a debit instead of a credit.

I called IB customer support. They contacted the counter party, which I assume is the MM. The counter party refused to accept that a mistake was made when it clearly was the case. I lost my faith in humanity today. The worst in us surfaces when interactions are anonymous.

I have bought and sold IBs a few times and have never made a mistake until now. This is one hard mistake to forgive myself. I also find it hard to believe that the trading platform did not have a reasonableness test built into each order. If dropping my coffee cup onto my keyboard accidentally resulted in $100000 being the order price transmitted, I dread to think what the consequences of that would have been.

Lessons learnt:
1. Spread orders are not bound by bid and ask prices. If you enter an incorrect price, you are not limited to the bid and ask price.
2. Human errors will occur. You can only try your best to be as careful as possible.

Hey Fox - it is recorded somewhere here in the archives of ASF where I was also bitten by IB's negative pricing on spreads. I lost 3K in the blink of an eye. I had not previously had any experience with negative pricing and found it quite confusing to say the least. Had a similar response from IB as you did.

At the time, I went through all the ASX documentation and found buried somewhere in their site that online brokers to the Oz market are required to ensure adequate filters for online trading. I believe you should at worst pay no more than the ask on any leg and get no less than the bid on any leg. I felt that, if there had been adequate online filters, there would have been an error message of some sort giving the opportunity to cancel the order.

The ASX site do have a complaint form. I filled one out on the basis of the lack of adequate filters, but in the end decided not to proceed at that time. My reasoning was that IB would probably get upset and wouldn't want me as a customer - leaving me stuck with Oz brokers high fees. At the time, I was trading quite heavily and would have lost a similar amount in fees alone over a period of time.

I also thought IB had fixed this negative pricing in spreads. I remember sending an email to their Oz office and it all appeared to be fixed at the time. Option trading is difficult enough without having to deal with negative pricing when positive pricing with the appropriate buy or sell attached to the order does the job and removes that element of confusion.

I think I still have the ASX form I filled out somewhere if you are interested in how I had planned to go about the complaint. I'm not one to blame others for my mistakes, but don't like it when the mistake has happened due to someone else's slackness.

One of my initial reasons for considering sending in a complaint to the ASX was to hopefully help prevent others from getting burnt in the same eat - so now I am regretting not following through as it may have forced IB to improve their filters and spared you (and maybe many others) the pain.

I also have my suspicions that this is something that is not a worldwide thing with IB - possibly just in the Oz market and maybe other smaller countries. I have never heard of anyone using IB for US trading complain of this negative pricing thing.

If anyone is using IB to trade US options - have you ever had spreads show up as negative amounts? eg you want to sell a spread, but the order shows up as a buy with a negative price?

Anyway, sorry for the late reply - didn't log into ASF for a few days!

 

[cutz]

Hi Sails,

I don't trade US options because of the hours but buy for credit spreads are quoted as negative prices on the euro exchanges.

 

[sails]

Thanks Cutz - so it's also on the euro exchanges. I used to regularly read the option forums at ET and never heard complaints about IB dishing up negative pricing for US option spreads.

 

[Fox]

I believe you should at worst pay no more than the ask on any leg and get no less than the bid on any leg.

That's my view as well. When I entered the incorrect price, the ask price was around -$1. I would have thought it fairer that -$1 instead of +$1.16 be the price I paid for the spread.

You are quite right about the lack of choices of brokers for oz options. I'm currently only playing for small stakes ie. single contracts. Although I lost a bundle in this bungle, I would have lost the same amount in the last 3 months in fees alone had I stuck with etrade and commsec. Hence, my analogy of owning a gun that misfires being better than not owing a gun at all.

.. didn't log into ASF for a few days!

You have been missed in this forum, I'm sure. Good to have you back.

 

[mazzatelli]

If anyone is using IB to trade US options - have you ever had spreads show up as negative amounts? eg you want to sell a spread, but the order shows up as a buy with a negative price?

It happens for some custom spreads e.g. Iron Flies, ratio flies

 

[sails]

That's my view as well. When I entered the incorrect price, the ask price was around -$1. I would have thought it fairer that -$1 instead of +$1.16 be the price I paid for the spread.

But why they have to turn prices upside down when it is totally unnecessary in the first place is totally beyond me.

I have occasionally used negative pricing (since I learned about it the hard way!) - but it has been for the reason of placing an order for a cheap spread and keep it far enough away from the market while observing what's going on in market depth before getting serious about getting it filled.

You are quite right about the lack of choices of brokers for oz options. I'm currently only playing for small stakes ie. single contracts. Although I lost a bundle in this bungle, I would have lost the same amount in the last 3 months in fees alone had I stuck with etrade and commsec. Hence, my analogy of owning a gun that misfires being better than not owing a gun at all.

As long as it doesn't misfire too often and too fatally!

You have been missed in this forum, I'm sure. Good to have you back.

thanks - but it's good there are now so many others to offer help and share their experience in the options threads here at ASF!
As others know, I have a daughter that has been unwell for some time and she is now a single mum with two girls. So most of my trading has been put on hold to help them through this rough time. And the good news is we are seeing steady improvement - and that makes the effort so worthwhile! So, there will be times I disappear - hopefully no more than a few days at this stage anyway!

 

[sails]

It happens for some custom spreads e.g. Iron Flies, ratio flies

Do you know why it's done, Mazza?
Is there any purpose to it at all except for hoping to catch the unwary and relieve them of their account funds? need a sarcastic smiley here!

 

[wayneL]

And the good news is we are seeing steady improvement - and that makes the effort so worthwhile! So, there will be times I disappear - hopefully no more than a few days at this stage anyway!

That's good to hear M. Much more important than any stinking option.

Best wishes for continued improvement.

 

[mazzatelli]

Do you know why it's done, Mazza?
Is there any purpose to it at all except for hoping to catch the unwary and relieve them of their account funds? need a sarcastic smiley here!

I've no idea M, but it is definitely annoying.
If only they could replicate TOS execution platform, they would be perfect
btw, great to hear the family situation is improving. May it continue!!!

 

[cutz]

Hi Fox,

With your iron fly, set it up as a sell/buy/buy/sell and you will get normal pricing (without the negative), works a treat.

 

[Fox]

set it up as a sell/buy/buy/sell and you will get normal pricing (without the negative), works a treat.

Duh! Why didn't I think of that? That's going to help all my future IB trades. Thanks Cutz. That is a very elegant solution to a horrible problem. A good example of thinking outside the box.

All novices, listen up. This tip from Cutz will save you a lot of heart ache.

 

[sails]

Hi Fox,

With your iron fly, set it up as a sell/buy/buy/sell and you will get normal pricing (without the negative), works a treat.

Hi Cutz - have you found this works in real time? I thought I did something like that when I tried to exit my fateful calendar spread with IB - and found I had paid a debit instead of receiving a credit.

At the time, the description that TWS generated didn't make sense, so make sure it's all OK before clicking OK - which is also the point of no return.

EDIT: Have found the thread where this was discussed - and this is the initial post where I posted a screen shot screen shot: https://www.aussiestockforums.com/forums/showthread.php?p=206523#post206523 and another: https://www.aussiestockforums.com/forums/showthread.php?p=206855#post206855

Hopefully, my mistake can be used to help prevent others doing the same thing!

 

[cutz]

Hi Sails,

Yep that iron fly i was describing i've used in real time so selling the credit spread works the way that's expected and you end up with a short position.

It also worked when i was building a put backspread on an equity position, initially i entered the legs as buy more/sell less, got negative pricing then deleted that combo, set it up as sell more/buy less and it worked beautifully.