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Does Volume Matter With Futures Options?

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Does Volume Matter With Futures Options?

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  #11 (permalink)
Redwood City, CA
Experience: Advanced
Platform: SierraChart and TWS
Broker: Interactive Brokers
Trading: ES, CL, GC, 6E, ZN/ZB, FGBL, and options
Posts: 12 since Aug 2017
Thanks: 3 given, 29 received

Hi, TWS user and options trader here.

There's a ton of nice options tools in TWS. Just to give you some pointers on what you can find there, you can open the Risk Navigator and either analyze your real portfolio or create a simulated one, and then have it show all the Greeks aggregated in many different ways (per product, per sector, per country, per currency etc), and you can even plot some risk analysis charts with different scenarios you can specify (things like an increase or decrease in IV, or at a specific date in the future, etc).

With the Model Navigator, you can see all the underlying model IB is using to perform calculations, including things like expected cash flow of dividends (if you are looking at stock options), or interest rates, IV per strike, etc. If you want, you can even customize these values if you have a better model.

There's the Option Chain window, where I actually place most of my trades - if you enable the "Strategy" setting on the bottom, you can create more complex, multi-legged strategies. It will even show some of the same data you said you found on the order confirmation screen.

There's a similar, but different, window called Options Trader. What I use this one for is if I want to trade IV - you can easily place orders indicating the IV you want to buy or sell the option for, and it will dynamically update the price for you. Also, it allows you to attach a delta-hedge order, meaning that it will automatically buy or sell the right amount of underlying to give you a delta exposure as close to 0 as possible. I find this especially useful if I'm in the process of closing a complex book of options, and I don't want to get unnecessary delta exposure as I close each node.

There are lots of other tools that you can use to visualize information on options, including the term structure of IV, or how the volatility skew changes over time, etc.

Finally, there's an Option Lab, which I never really use, but is interesting nevertheless - it shows you the probability distribution of the price of the underlying based on the market prices of options. You can then adjust the probability distribution to match your model / your beliefs, by dragging around the curve. You can then ask IB to find the best strategies for you to trade based on the difference between the market implied distribution and your distribution.

Sorry, there's a lot of stuff here. But hopefully it might give you some ideas to explore!


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  #12 (permalink)
Legendary Market Wizard
Houston, TX
Experience: Advanced
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Great Post @bfreis

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  #13 (permalink)
Kyoto, Japan
Experience: Intermediate
Platform: TW TOS LiveVol
Broker: TD, TW, IB, Saxo
Trading: VXX, VIX, SPY
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>My concern is liquidity when it comes to execution time, since some days lately I see almost no trades at all on this specific option

Liquidity is edge.

And increasingly liquidity is being concentrated during a crash in two names: VXX and SPY

Edge and risk.

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  #14 (permalink)
Toronto Canada
Posts: 50 since Jan 2017
Thanks: 4 given, 103 received

1. The option price will trade with respect to delta. If a delta is 50% then if gold goes up $1 the call option will increase 50 cents. Delta of 20% then 20 cents. That is one reason the price isn't moving as much.

2. Another other reason is that with no volume the bid/offer spread is part math calculation and part financing issue. By financing I mean that cash needs to be posted for premium so a deep-in-the-money option has a high funding cost, therefore ITM option holders will try to value the option at the minimum of the bid/offer spread on settlement, but higher during trading hours. Also, most ITM option holders are larger firms holding larger positions and have more clout in determining settlements and spreads. If you can't do a put/call conversion to futures then you have to pay the price for playing with large premium options; most option traders buy deep out of the money options and gamble.

3. However your idea of buying deep in the money options is fundamentally correct because if the price falls a lot prior to expiry (say, to the strike) the option may retain some real value, whereas if it goes up past the strike you will have a price move the same as a full future (after expiry). So in a way you might think of it as paying a premium for this risk reduction.

4. Therefore the quotes you are seeing are by dealers who will arbitrage your option price against the gold future to earning a profit spread, so yes due to liquidity you will pay an additional spread with respect to a gold future. But generally traders aren't looking to scalp options, they are looking for bigger moves and don't mind (too much?) paying a spread for the high leverage.

5. If you are holding to maturity then their is nothing wrong with exercising into a gold future, but you need to post the margin, which may not be more than the profit earned on the trade. If you don't have the margin then IB is forced to liquidate the future for you. I have never experienced that, but from what I have been told by brokers a forced liquidation is not a desirable process for them or you. Most options traders don't have the margin or want to commit margin for this, that is why they are trading options in the first place.

6. I suggest you read some good books.

Good luck!

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