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Does Volume Matter With Futures Options?


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Does Volume Matter With Futures Options?

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  #1 (permalink)
Seattle, WA
 
 
Posts: 8 since Sep 2019
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Hello All,
I am considering purchasing an October gold call option which is well in the money, though a bit expensive.
Sure it expires in the coming weeks, but I'm interested in a short term play so I'm not too concerned with expiration.

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. There is always a bid and an ask so it is (apparently) trading.
It is my understanding that liquidity won't matter when I exercise the call option as every call must be written by somebody who created a put. And so my ability to exercise is guaranteed. But I want to make sure.

Is my understanding of my certainty to be able to execute before expiration correct, or is there something I may be missing? Could the lack of current liquidity pose an unforseen problem of some kind?

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  #3 (permalink)
Market Wizard
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GoldBugged View Post
Hello All,
I am considering purchasing an October gold call option which is well in the money, though a bit expensive.
Sure it expires in the coming weeks, but I'm interested in a short term play so I'm not too concerned with expiration.

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. There is always a bid and an ask so it is (apparently) trading.
It is my understanding that liquidity won't matter when I exercise the call option as every call must be written by somebody who created a put. And so my ability to exercise is guaranteed. But I want to make sure.

Is my understanding of my certainty to be able to execute before expiration correct, or is there something I may be missing? Could the lack of current liquidity pose an unforseen problem of some kind?

If you buy an option, your ability to exercise is guaranteed by someone who has sold this option.

Trading options with low liquidity might yield problems in case you want to sell the option early. Bid / ask might be wide.

Best regards, Myrrdin

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  #4 (permalink)
Legendary Market Wizard
Houston, TX
 
Experience: Advanced
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Option market makers generally are trading volatility and the other greeks and often not price/delta. As such they are happy to buy and sell any option at the right (implied) volatility. This is why when you pull up option prices there are nearly always bid/asks but not necessarily any trades. The quotes are market makers and not flow. Generally they can be relied upon to make good markets most of the time. I say generally because in times of stress they have been known to withdraw from the market leaving no market at all. There have been some (heated) discussions about this in the Selling Options on Futures thread when exactly this has happened, when the market has moved violently on Sunday evenings.

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  #5 (permalink)
Seattle, WA
 
 
Posts: 8 since Sep 2019
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myrrdin View Post
If you buy an option, your ability to exercise is guaranteed by someone who has sold this option.

Trading options with low liquidity might yield problems in case you want to sell the option early. Bid / ask might be wide.

Best regards, Myrrdin

Sorry for the late response, I thought I was getting notifications and I was not.
Anyway, OK, thanks for confirming that.
I always thought I would hold them to maturity but now I'm not so sure.
I've read (perhaps it was erronious) that with Interactive Brokers you cannot hold to maturity unless you are prepared to actually perform the buy IE lay out the full cost of the underlying, and then wait for the sale to complete. I always had the understanding that the execution of an option was an instantaneous profit taking of the difference between the strike price of the option minus current market price. So I guess I've had this all wrong?

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  #6 (permalink)
Seattle, WA
 
 
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SMCJB View Post
Option market makers generally are trading volatility and the other greeks and often not price/delta. As such they are happy to buy and sell any option at the right (implied) volatility. This is why when you pull up option prices there are nearly always bid/asks but not necessarily any trades. The quotes are market makers and not flow. Generally they can be relied upon to make good markets most of the time. I say generally because in times of stress they have been known to withdraw from the market leaving no market at all. There have been some (heated) discussions about this in the Selling Options on Futures thread when exactly this has happened, when the market has moved violently on Sunday evenings.

Again, sorry for the late response.

Thanks for your response. And well that's a pretty scary scenario you describe, because at times of stress may be when you most want to sell but then cannot.

Another question not exactly on topic but related, what happens if I purchase an option and the price of the option goes up, but is still below my break even? Can I sell for a profit, and how much?

EG Say I buy a gold option with $1500 strike price for $25, and my break even is then $1525.
Then the price goes up to $35 for the option, but the current price of gold is only say $1490.
Do I profit just off of the price of the option or is the underlying relevant here?

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  #7 (permalink)
Legendary Market Wizard
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GoldBugged View Post
I always had the understanding that the execution of an option was an instantaneous profit taking of the difference between the strike price of the option minus current market price. So I guess I've had this all wrong?

There's two types of option. Financially settled options settle the way you describe. There are also options that go to actual delivery, in most cases it's the futures contract itself, there may be options though where delivery is the actual physical commodity. I believe if you exercise a COMEX Gold Option, you get a COMEX Gold Future.


GoldBugged View Post
And well that's a pretty scary scenario you describe, because at times of stress may be when you most want to sell but then cannot.

Agreed - although this is a pretty rare scenario.

GoldBugged View Post
Another question not exactly on topic but related, what happens if I purchase an option and the price of the option goes up, but is still below my break even? Can I sell for a profit, and how much?

EG Say I buy a gold option with $1500 strike price for $25, and my break even is then $1525.
Then the price goes up to $35 for the option, but the current price of gold is only say $1490.
Do I profit just off of the price of the option or is the underlying relevant here?

Not sure I understand the question. You can always sell an option you purchased for whatever the going rate is, whether that's a profit, loss, above break even or below. If we talk about Call Options, two things make the value of Call Option go up. The price going up and implied Volatility going up. So there could be a situation where you buy a Gold Call Option, the price of Gold goes down, but the price of the option still goes up, IF the implied volatility went up a lot. Normally though the pnl effect from Volatility (Vega) is less than the pnl effect from Price (delta) and this rarely happens.

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  #8 (permalink)
Seattle, WA
 
 
Posts: 8 since Sep 2019
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SMCJB View Post
There's two types of option. Financially settled options settle the way you describe. There are also options that go to actual delivery, in most cases it's the futures contract itself, there may be options though where delivery is the actual physical commodity. I believe if you exercise a COMEX Gold Option, you get a COMEX Gold Future.


Agreed - although this is a pretty rare scenario.

OK good to know. So I think that if I want to 'cash in' I'll probably just sell the option. Unless it's one of those rare scenarios where the market has up and left, then I can just exercise to get the future, which is guaranteed to sell. Handy information if that problem liquidity scenario ever happens.


SMCJB View Post
Not sure I understand the question. You can always sell an option you purchased for whatever the going rate is, whether that's a profit, loss, above break even or below. If we talk about Call Options, two things make the value of Call Option go up. The price going up and implied Volatility going up. So there could be a situation where you buy a Gold Call Option, the price of Gold goes down, but the price of the option still goes up, IF the implied volatility went up a lot. Normally though the pnl effect from Volatility (Vega) is less than the pnl effect from Price (delta) and this rarely happens.

OK, thanks again. That explains a lot. Especially the scenario I saw where the price of gold dipped but the price of the option actually went up slightly. So in the end its the price of the option itself which I sell that determines my return. Regardless of the various factors, underlying asset price, volatility, etc which may have affected that price.

Just curious do you know of a data stream I can subsribe to in order to monitor implied volatility?
I'm using Interactive Broker's TWS.

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  #9 (permalink)
Legendary Market Wizard
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IB may/probably have that calculation pre-performed for you, but not sure how you would pull it up.

https://www.cmegroup.com/tools-information/quikstrike/volatility-term-structure.html
Is an interesting resource. Just change the product to Gold.

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  #10 (permalink)
Seattle, WA
 
 
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SMCJB View Post
IB may/probably have that calculation pre-performed for you, but not sure how you would pull it up.

https://www.cmegroup.com/tools-information/quikstrike/volatility-term-structure.html
Is an interesting resource. Just change the product to Gold.

Yes, very interesting.
By the way I did find related information in TWS. If you just place an order for a gold option there will be a confirmation popup which will display an interactive chart with the 'greeks' mapped.
It seems I need to read more on volatility trading and the 'greeks'.
Thanks again for pointing it out.

Edit: By the way I was actually curious about this factor, but didn't know what to call it.
I have noticed a number of times now, that since the price of gold has dropped recently the price of some gold options have not fallen in proportion. In fact one of them in particular seems particularly stubborn, gold price drops significantly, and the option only drops maybe a dollar or so, and only briefly, then pops right back to where it was. And it's mostly the bid price that drops but not much on the ask. I was hoping to get a good deal on this option, but it looks like it is not going to happen. Looks like I've found my next research project

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