Example: Shows the market credit spread for a bid of $1.00 and an ask of $1.60. Selling the spread and collecting $1.45 or $1.50 is unlikely (unless the price of the underlying asset changes). A buy order for the spread you are selling is required to reach that price. The order should almost certainly be from a retailer. Offer must be the lowest price available. It’s a pretty long shot.
Most of the time you need to trade with a market maker. But if the options we trade are very active, it’s very likely that one customer is bidding on the option that we want to sell and another customer is offering the option that we want to buy. (don’t expect it to happen often). In that case, our broker’s computer should be able to find the bid and offer and trade both orders almost instantly to close the trade at a favorable price. That’s the theory.Actually both orders should exist at the same time and Neither order is sufficient for immediate execution, and Before the broker’s computer works, make sure there are no other orders (similar to yours) that could get these two option orders. That’s pretty asking.
The point is that the transaction is not cheap. Every time you place an order, you should expect slippage (where the order is filled at a price worse than the midpoint). Assuming that the middle price (between Bid and as) is the fair price, almost all trades are worse than that fair price. As such, they cannot afford to trade frequently. Note: Never decline important deals just to avoid slippage.
You can make money by positive theta (time decay) when you use an income generating strategy. Overcome that slippage by keeping trades. It is important to recognize potential misconceptions. Not entitled to time decay benefitsThe market may not move if we hold positions. You might wait for theta to come, but you could lose a lot more money than theta offers. Waiting is not without risks.
This risk cannot be ignored and risk management skills should be applied where appropriate. Hold a position if it works, the risks are within your comfort zone, and there are no other compelling reasons to adjust or exit the position.That’s how theta is collected— by taking risks.IIt’s not just about transferring money to your bank account.
The trading game is all about timing when technical analysis is used to make entry and exit decisions. Non-option traders can exit trades in seconds or minutes. Slippage hinders (or severely limits) your potential for immediate profit in options trading.
The type of strategy I recommend most often (“income generation”) takes into account special items of no interest to short-term equity traders.
Is Implied Volatility High or Low?
In either situation, I plan to hold the position until the IV returns to the average (return to near-average levels). Equity traders want price volatility and option premium level is not important
- In either situation, I plan to hold the position until the IV returns to the average (return to near-average levels). Equity traders want price volatility and option premium level is not important
Has the market been volatile or calm lately?
The success of our strategy may depend on volatile or calm markets.Stock traders only look for predicted price changes
- The success of our strategy may depend on volatile or calm markets.Stock traders only look for predicted price changes
· Is the market trending up or down?
o If you follow the trend the usual plan is hold and let the trend work
Are there any major news events impacting the market?
- You may prefer to finish before that news release
Too much risk for delta, gamma, theta, or vega?
Risk is measured by Options Greeks.If a particular risk factor is too high for comfort, reduce it
- Risk is measured by Options Greeks.If a particular risk factor is too high for comfort, reduce it
If a trader anticipates a sizable market move in a very short period of time and wants to bet on the direction of that move, the best option is to own an in-the-money put or call option. Keep your premiums as low as possible (just in case she’s wrong). There is no reason to buy or sell spreads with embedded slippage.
Note: If traders make this play because news is pending, expect option prices to go higher. When “everyone” knows news is coming, options are in demand (many buyers, few sellers) and prices go up. Options become attractive to speculators despite higher-than-usual premiums when it is known that the price difference is more likely than usual. Care should be taken when making a bullish or bearish play (buying a single option) in these situations. Profits are limited, but spreads are almost always better value. In such situations, it is better to trade credit or debit spreads as vega is less. Buy options with a premium, but sell other options. Net Vega will decrease.
Never delay necessary adjustments or closeouts because of transaction costs. Slippage is part of the cost of doing business. This does not mean that the winning trader will pay the ask price or sell the bid price. She is still trying to get a reasonable trade execution, but knows up front that some slippage will cost her when trading.
It is good practice to be aware of the costs of trading (fees, slippage).
Sometimes you should avoid trading because the profit potential (after fees) is too small.
If your position is outside your comfort zone, you don’t need to worry about trading costs. Risk management comes first. Use common sense or Greek to figure out what’s going wrong in that position.
This post was presented by Mark Wolfinger and is an excerpt from his book An Options Trader’s Mindset: Think Like a WinnerYou can buy the book on Amazon. Mark has been in the options business since 1977, when he began his career as a floor trader on the Chicago Board Options Exchange (CBOE).Mark published seven books About options.his Options for newcomers This book is a classic primer and a must read for all options traders. Mark holds a bachelor’s degree from his college in Brooklyn and a PhD in chemistry from Northwestern University.