Options Market Maker Caught With Pants Down?

[RandR]

During the sharp rise in CPU on monday I had a look at the call options trading being conducted on it. To me it appeared a market maker had been caught out by not updating his prices to represent the sharp rise in the SP of CPU. The MM was Selling $8 december expiry for calls for 11.5 cents. When the SP was above 8.40 ?

Am I missing something or was the market maker caught out ? Ive been looking at the pricing of CPU call options and it has appeared the MM has only been changing pricing on a daily basis (ie: not pricing options 'live' in relation to daily movements in the SP)

FWIW, the same options series was being offered on tuesday for 45 cents ...

I just cant believe it would be possible to snap up a 400% 'arbitrage' opportunity. Seems to silly to be real ... but thought id pop the question.

 

[skc]

During the sharp rise in CPU on monday I had a look at the call options trading being conducted on it. To me it appeared a market maker had been caught out by not updating his prices to represent the sharp rise in the SP of CPU. The MM was Selling $8 december expiry for calls for 11.5 cents. When the SP was above 8.40 ?

Am I missing something or was the market maker caught out ? Ive been looking at the pricing of CPU call options and it has appeared the MM has only been changing pricing on a daily basis (ie: not pricing options 'live' in relation to daily movements in the SP)

FWIW, the same options series was being offered on tuesday for 45 cents ...

I just cant believe it would be possible to snap up a 400% 'arbitrage' opportunity. Seems to silly to be real ... but thought id pop the question.

What volume was available?

To form an arbitrage you need to short CPU at market. Not quite 400% but ~10% risk free is still pretty decent.

 

[wayneL]

I doubt it.

What price were puts?

 

[sails]

How do you know it was a market maker?

Did you see it in the market depth? Or could it have been the last traded price?

 

[RandR]

How do you know it was a market maker?

Just a strong hunch based off the fact that Ive looked at that particular series a few times in the last few weeks, and the market maker depth has been 250 contracts, which is the number of contracts that were traded for 11.5 cents on monday at 11am-ish. That and the options on this stock are so illiquid the majority of trades are taken against a market maker.

But I cant be certain it was ...

Did Or could it have been the last traded price?

When I looked at it on monday afternoon, (i use comsec) it said the last traded time was 1150am, with 250 contracts traded.

I doubt it.

I thought the same, which is why I thought id post the question here to see if this is something that could indeed/or has happened before.

What price were puts?

Didnt look at puts.

What volume was available?

At least 250 contracts - the depth the market maker had set on that series the couple of times I had looked at previously.

 

[RandR]

I had noticed previously in the preceeding couple of weeks that the market maker prices didnt seem to be moving at all until the next day based upon daily SP movements (could have simply been a result of the next to 0 movement in the underying SP of CPU over the preceeding weeks.)

But I just cannot believe a market maker wouldnt be 'live pricing' .. the thought seemed ridiculous to me, which is why I thought Id pop the question here.

 

[wayneL]

Next time you think there is an arb opportunity, do your put/call parity equation, including consideration of dividend.

Also make sure the price is tradeable.

I don't believe there are arb opportunities open for more than milliseconds.

 

[skyQuake]

I had noticed previously in the preceeding couple of weeks that the market maker prices didnt seem to be moving at all until the next day based upon daily SP movements (could have simply been a result of the next to 0 movement in the underying SP of CPU over the preceeding weeks.)

But I just cannot believe a market maker wouldnt be 'live pricing' .. the thought seemed ridiculous to me, which is why I thought Id pop the question here.

What series were they? Were they CPUMX8?

 

[skyQuake]

Just had a better look at it,

Might be something wrong with Commsec or commsec using delayed data. Last trade was 250lots @ 52c at 11:10:50am on monday. It was a tailor made combo so that may be why prices didnt update, and last traded price stayed at 11.5c
Looking at historical bids/asks show that it stayed between 40~55c on Mon.

Cheers

 

[RandR]

Just had a better look at it,

Might be something wrong with Commsec or commsec using delayed data. Last trade was 250lots @ 52c at 11:10:50am on monday. It was a tailor made combo so that may be why prices didnt update, and last traded price stayed at 11.5c
Looking at historical bids/asks show that it stayed between 40~55c on Mon.

Cheers

thanks for clearing that up quake !