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Pricing precision problems w/low-cost options (IEF)
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Pricing precision problems w/low-cost options (IEF)

  #1 (permalink)
Trading Apprentice
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Pricing precision problems w/low-cost options (IEF)

Background: I'm looking to hedge against rising 30-year mortgage rates while we shop for a house. I can afford a small swing, but if there's >1/2% rise in mortgage rates, I'd like to recoup some of the added expense.

My strategy is that I plan to buy out-of-the-money puts on IEF in an IRA account. The way I look at it is that the amount out of the money will act as a "deductible" on my "insurance policy," and the cost per contract is essentially the insurance premium. I need to buy about 100 contracts to cover what I believe is a good representation of my mortgage rate risk.

I'm looking at the 104 June 2015 puts because it looks like a good balance between a reasonable time premium and reasonable open interest. Current ask is $0.20/share, which is about the limit for what I'd like to spend to do this.

The problem I have is that there's a 25% price difference between $0.15 and $0.20 per share, which is a terrible level of precision. I don't want to pay as much as 25% more than I actually need to. I have no idea at what point the market makers will raise the ask to $0.25, but of course ideally I'd buy them right before that.

Is there another equivalent high-volume ETF that would accomplish the same thing without this problem? I've given up on futures in an IRA, so futures are out. Are there other strategies where I could get better pricing precision without spending any more on the contracts? Why in the world is the precision so low on the exchange?

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  #3 (permalink)
Market Wizard
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randomengineer View Post
Background: I'm looking to hedge against rising 30-year mortgage rates while we shop for a house. I can afford a small swing, but if there's >1/2% rise in mortgage rates, I'd like to recoup some of the added expense.

My strategy is that I plan to buy out-of-the-money puts on IEF in an IRA account. The way I look at it is that the amount out of the money will act as a "deductible" on my "insurance policy," and the cost per contract is essentially the insurance premium. I need to buy about 100 contracts to cover what I believe is a good representation of my mortgage rate risk.

I'm looking at the 104 June 2015 puts because it looks like a good balance between a reasonable time premium and reasonable open interest. Current ask is $0.20/share, which is about the limit for what I'd like to spend to do this.

The problem I have is that there's a 25% price difference between $0.15 and $0.20 per share, which is a terrible level of precision. I don't want to pay as much as 25% more than I actually need to. I have no idea at what point the market makers will raise the ask to $0.25, but of course ideally I'd buy them right before that.

Is there another equivalent high-volume ETF that would accomplish the same thing without this problem? I've given up on futures in an IRA, so futures are out. Are there other strategies where I could get better pricing precision without spending any more on the contracts? Why in the world is the precision so low on the exchange?

Why did you give up on futures in an IRA ? Carley Garner (deCarley Trading) wrote a couple of days ago in this forum that futures in an IRA are no problem for her.

Best regards, Myrrdin

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