GreatPig
Pigs In Space
- Joined
- 9 July 2004
- Posts
- 2,368
- Reactions
- 14
I feel for you GP.GreatPig said:How can the MM get away with this???
BSL has shot up over 8% and the MM now has a buy-sell spread on a call warrant of 27 cents vs 47 cents, while BSL itself only has a one cent spread.
I want to sell the warrant, but by my calculations it should currently be worth around 37 cents. In fact it was showing 36 cents when I first noticed it, but a few seconds later when I refreshed it had dropped to 27 cents.
Surely they can't be allowed these sorts of spreads?
GP
cuttlefish said:This is the big challenge of trading warrants and options - the dependency on the market makers. My experience from the options trading I've done (and I've decided to leave them alone except for very specific situations) is that the theoretical extra leverage you get from options actually gets eroded by the large spread cost you have to pay due to lack of liquidity.
So basically unless you day trade (or short time frame trade) a highly liquid options or warrants series where the market is made up of other traders as well as the MM's, I'm not convinced they're a great idea.
My thinking has moved to allocating more capital and doing larger trades on the underlying as a better way to leverage a trade though with that approach the fat tail risk is there which you are at least protected from via options or warrants.
In relation to getting a decent price, something I have found is that if you place an order out there at or above the theoretical price (if selling) or below if buying, you'll often find another trader or the MM will come out and put a counter in place - if you slowly move your order down you might find someone either jumps on your price, or comes out of the woodwork with a more reasonable counter.
The other factor is to be very aware of is the influence of greeks when trading warrants or options because this will affect the prices and spreads and can also explain why a MM won't give the price you expect.
If your trading is reliant on MM's obeying the 'rules' then you will not do well with options or warrants - you need to be assuming the MM's are completely unhelpful and will not give you a price unless they see a genuine arbitrage opportunity IMO.
wayneL said:Hi cuttlefish,
If using options strictly for leverage on directional trades, then yes the spread is an impost (together with commish, termed "contest risk") that is hard to justify.
I agree this is not the best use of options. Magdoran might disagree, but he would concede that a different modus operandi is required than that of a straight share (or cfd) trader.
The reality of options is that you are not just trading delta (direction), you are trading 5 other price outputs as well (gamma, theta, sigma, vega and in volatile interest rate environments, rho)
For instance I put a bearish strategy over the SP500 the other day. Recognising it was putting a penny on the track in front of a freight train, I wanted a strategy that was short delta, long gamma, long vega on the downside, but theta positive and long delta on the upside.
This means if I was wrong about direction (which I was spectacularly so) I would still come away with a profit and I have.
That strategy was a put backspread. I wasn't just trading direction.
Sounds like a "we'll make a market as long as it doesn't cost us too much money" clauseHowever, there are no spread on quantity obligations applied to the market making requirements. The quality of market making will depend on competitive pressures. In times of extreme volatility the ability of market makers to maintain a market will be put under stress. Investors should be aware that in these situations, the presence of quotes suitable to your particular requirements in the market cannot always be assured.
May sound like a silly question, but how do Warrant MMs hedge their position?markrmau said:Another reason the spread may temporarily be poor is that there are insufficient bids or offers on the underlying for the MM to hedge.
Hello Mofra,Mofra said:May sound like a silly question, but how do Warrant MMs hedge their position?
Is it in the same manner as ETO MMs ie equivalent positions to conversions & reversals?
Mag,Magdoran said:I hope that answers your question.
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