How do ETOs work?

[wilderbeest77]

Hi,

I've traded warrants with some success and thought I'd try ETO's but I'm having problems with liquidity.

For instance I would like to buy an NCM June 08 2589 option. It is listed but there are no buyers or sellers. I could buy an NCM June 08 2600 warrant for about $10 at the moment. And be able to sell it when I want.

I don't understand how ETO's work. Aren't there market makers to make sure there is a market? I can see that there is some liquidity for short dated options but most of them are not very liquid for over about 3 months.

Do ETO's have any advantages over warrants?

Thanks for any help.

 

[wayneL]

Re: ETO's

Hi,

I've traded warrants with some success and thought I'd try ETO's but I'm having problems with liquidity.

For instance I would like to buy an NCM June 08 2589 option. It is listed but there are no buyers or sellers. I could buy an NCM June 08 2600 warrant for about $10 at the moment. And be able to sell it when I want.

I don't understand how ETO's work. Aren't there market makers to make sure there is a market? I can see that there is some liquidity for short dated options but most of them are not very liquid for over about 3 months.

Do ETO's have any advantages over warrants?

Thanks for any help.

If you want to buy that deep in the money you are better sticking with warrants in the Oz market IMO. You will only really get quotes atm and 2 or 3 strikes either side in most cases. (with the caveat that I haven't trade oz eto's for a long time, so someone might have better info).

US market is a different story though and you'd have no problems getting quotes that far ITM, but that's not much use to you there.

 

[ithatheekret]

Re: ETO's

Wayne , I owe you an apology , I did not realise you meant the technical term and feel like a twit for not registering , I thought it was an academic bit of sarcastic fun .

My sincere apologies . Whilst not an excuse , I use candles and Ichimoku and once having taken up technical studies , have turned to a simple indicator , so as not to get congested and make sure I am using the same tool as my competitors .

Again sorry , but the play on words was fun .

 

[VolTracker]

Re: ETO's

The EoD quote for the NCMSH Jun08 2589 call is $8.44. The IV is 27%, pretty low for NCM (todays weighted average was 35% and HV was 51%). You can test the market with a bid, and the MM's may but are not necessarily obliged to give you a bid/ask spread.

The market makers have different obligations to provide quotes for different stocks. Outlined here:
http://www.asx.com.au/investor/options/trading_information/market_makers.htm

Most interesting is the bit that says they are only obliged to provide a quote 50% of the time...how come?

Re: the question of warrant vs eto's, I have found that while the warrants are more continously quoted, the iv's tend to be less for eto's, often substantially so.

 

[legout]

Re: ETO's

Hi,

I've traded warrants with some success and thought I'd try ETO's but I'm having problems with liquidity.

For instance I would like to buy an NCM June 08 2589 option. It is listed but there are no buyers or sellers. I could buy an NCM June 08 2600 warrant for about $10 at the moment. And be able to sell it when I want.

I don't understand how ETO's work. Aren't there market makers to make sure there is a market? I can see that there is some liquidity for short dated options but most of them are not very liquid for over about 3 months.

Do ETO's have any advantages over warrants?

Thanks for any help.

The market makers don't create a market, we do! The market makers simply match orders, and take their greedy little slice. I want their job. :

They are only required to offer a quote 50% of the time, when there is no market (buyers or sellers on the opposite side of the transaction).

I paper traded ASX options during the summer, and in many instances ran into liquidity issues, even when I followed the 'rules'.

One rule is NEVER trade an option with an OI less than 150. Still, this won't solve all your worries.

I thought the only problem was technical analysis. Ends up that even when you are RIGHT you may be ALL WRONG when it comes time to cash in...

While paper trading I threw on a few credit spreads that moved in my direction, but moved so much that I could NO LONGER CLOSE THE SOLD POSITION. Couldn't buy it back, and when I could get a quote, it was RIDICULOUSLY priced.

This made me rethink my strategy. I now aim to trade only the top ten most liquid options, with hundreds or even thousands in OI, and to not let the option get to far OTM, so I don't get screwed by the MMs.

Yes, it's hard to be right, and cut your profits by cashing out early, but beats waiting until expiry, unless that's your trading plan...

legout

 

[wayneL]

Re: ETO's

The market makers don't create a market, we do! The market makers simply match orders, and take their greedy little slice. I want their job. :

In an ideal world, yes. In reality, the MM(s) is on both sides of the bid and ask most of the time, even in the US. Where we retail traders come in (if in enough numbers) in is in keeping the bastards honest.

As far as wanting their job, it's harder than you think. VERY capital intensive, risky and stressful. You need superior mathematical skills with SPEED... and increasingly being taken over by 'puters. I'm happy on my side of the screen TBH.

 

[oranom350]

Re: ETO's

The market makers don't create a market, we do! The market makers simply match orders, and take their greedy little slice. I want their job. :

They are only required to offer a quote 50% of the time, when there is no market (buyers or sellers on the opposite side of the transaction).

I paper traded ASX options during the summer, and in many instances ran into liquidity issues, even when I followed the 'rules'.

One rule is NEVER trade an option with an OI less than 150. Still, this won't solve all your worries.

I thought the only problem was technical analysis. Ends up that even when you are RIGHT you may be ALL WRONG when it comes time to cash in...

While paper trading I threw on a few credit spreads that moved in my direction, but moved so much that I could NO LONGER CLOSE THE SOLD POSITION. Couldn't buy it back, and when I could get a quote, it was RIDICULOUSLY priced.

This made me rethink my strategy. I now aim to trade only the top ten most liquid options, with hundreds or even thousands in OI, and to not let the option get to far OTM, so I don't get screwed by the MMs.

Yes, it's hard to be right, and cut your profits by cashing out early, but beats waiting until expiry, unless that's your trading plan...

legout

Hi Legout,
I have been looking into ETO trading for a while. Like others, i have found that it is not as liquid as I had hoped. You mentioned that you only look at the top 10 most liquid stocks. If you don't mind me asking, what are some of these stocks in your list. I have identified OZL and NAB as two.

Cheers.

 

[jackson8]

Re: ETO's

Hi Legout,
I have been looking into ETO trading for a while. Like others, i have found that it is not as liquid as I had hoped. You mentioned that you only look at the top 10 most liquid stocks. If you don't mind me asking, what are some of these stocks in your list. I have identified OZL and NAB as two.

Cheers.

http://www.afr.com/home/tables.aspx

here is a link for end of date download of all puts and calls for aussie market. you can go through list and get a general idea of which are the most liquid by open interest list and volume for day

then make up your own mind as to which are more tradeable

 

[oranom350]

Re: ETO's

Hi jackson8,

thanks for the link, much appreciated.

kind Regards, o350.