Puzzling ASX data for options on individual Australian equities

[tormod]

Hi all,

I was recently looking over historical data (intraday) for options on individual australian equities, e.g. call and put options on BHP e.t.c., that are listed on the ASX. The data source is Thomson Reuters Tick History (I'm an academic so I can get access to this data through SIRCA). What I found looked very puzzling to me (admittedly I have no experience in trading options) so I thought I would ask here whether what I saw is normal. There were two distinct things I found odd:

1) The number of actual transactions was very low. For example, searching across all options on BHP (all strike prices and expiry dates, both put and call) for transactions over a randomly chosen two week period in 2014 resulted in ~50 transactions (this is across ~1000 options). Note, there were plenty of quotations over this interval, but very few actual trades.

2) The bid-ask spread in the quotations data was (to my mind) frequently enormous. It was not unusual to see a best bid price of 1.20 and a best ask price of 1.50. It isn't obvious to me how a speculator could possibly profit given such a wide spread.

Both these points together lead me to believe there is something pretty fundamental I don't understand about this data, so I thought I would come here and ask some people who actually trade these options day to day what I'm missing. Perhaps most of the market is OTC and not on the exchange (my understanding is that the data is all from options listed on the ASX)? If so, then where should I look if I want to see lots of historical intraday data on options on individual equities? What if I want to see the quotations data with the smallest spread? Perhaps what I describe above is normal?

Any help or pointers that you all can offer would be greatly appreciated, so thanks in advance.

Cheers,

tormod

 

[Sharkman]

1) The number of actual transactions was very low. For example, searching across all options on BHP (all strike prices and expiry dates, both put and call) for transactions over a randomly chosen two week period in 2014 resulted in ~50 transactions (this is across ~1000 options). Note, there were plenty of quotations over this interval, but very few actual trades.

wouldn't surprise me. there aren't many participants in the ASX options market, most of the transactions you've seen are probably instos or funds hedging their stock holding, with the odd prop trade. but retail trades make up a much smaller % of the total volume compared to other markets eg. US.

2) The bid-ask spread in the quotations data was (to my mind) frequently enormous. It was not unusual to see a best bid price of 1.20 and a best ask price of 1.50. It isn't obvious to me how a speculator could possibly profit given such a wide spread.

a 1.20/1.50 spread on a BHP option would suggest it's either fairly deep ITM or >3 months to expiry. spreads get really hideous on deep ITM options, normally they're better than that on closer to the money BHP options. although of late even the ATM spreads aren't as thin as they used to be. may have something to do with optiver exiting the aust market last year (less DPMM competition). and there's bugger all liquidity beyond 3 months, spreads are always going to be hideous there.

quite often they do in fact give you the mid or close to it, so in practice it's not as bad as it might appear. and if they don't then you can simply cancel the order and not enter the position - unlike a lot of other options markets, there's no cancellation fee, so it costs you nothing (except time i guess) to "probe" the spread and if you can't get a good fill, just take the order off, no harm done. so entering the position isn't usually too much of an issue.

but the problem with using them for speculation is that you need to exit at some point to book the profits, and as above it's on ITM strikes in particular where the spreads get really hideous, and you're less likely to get the mid, you'll probably have to cross most of the spread to get a fill.

so i mainly use them as an income generation device these days - the majority of my trades are either naked puts or covered calls. that way i don't have to deal with crossing an ugly spread to exit - i just pocket the premium, let them run to expiry and make sure i'm ok with taking a possible assignment before i enter the position. if they don't give me the mid on entry, i go away and try again later to see if they're more willing to deal.