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Getting Filled within the Bid/Ask Spread?
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Getting Filled within the Bid/Ask Spread?

  #1 (permalink)
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Getting Filled within the Bid/Ask Spread?

Hello,

I'm new to options on futures (and options in general) and trying to wrap my head around them. One major "issue" I see with futures options is the bid/ask spread, which sometimes amounts to giving up ~12% of an option's value. From other sites, I've read that getting filled with the b/a is possible, but I wanted the opinions of people who have actually traded options.

So, on options with large b/a spreads, how do you manage the fill? Do you just accept the spread, or do you place orders a couple cents off the midpoint? If so, do you usually end up getting filled?

Appreciate the help!

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If you sell, you are sure to get filled on the bid
if you buy, you are sure to get filled on the ask
(under normal circumstances, if this is a single exchange instrument)

If you put any order with a limit, in between the bid and ask, you will have
to wait for somebody hitting your order and accepting your price

It boils bottom line down to liquidity, the less the liquidity of the instrument
the more difficult it will be to get a fill

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elynt View Post
Hello,

I'm new to options on futures (and options in general) and trying to wrap my head around them. One major "issue" I see with futures options is the bid/ask spread, which sometimes amounts to giving up ~12% of an option's value. From other sites, I've read that getting filled with the b/a is possible, but I wanted the opinions of people who have actually traded options.

So, on options with large b/a spreads, how do you manage the fill? Do you just accept the spread, or do you place orders a couple cents off the midpoint? If so, do you usually end up getting filled?

Appreciate the help!

You can try - but I can tell you what will generally happen

Let's say bid is $2.35 and offer is $2.60

If you put in a bid @ say $2.36, you will most likely find that someone else suddenly puts one in @ $2.38. Doesn't always happen but don't expect to be the inside bid or offer for long and pick up the first market order to come along.

With options, it depends on your time horizon and whether it's a hedge or not. I've never day traded options but I can see this being quite problematic if you were. Longer term - I never really thought the spreads were a huge issue.

If you have any questions about the products or services provided, please send me a Private Message or use the futures.io "Ask Me Anything" thread
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rleplae View Post
It boils bottom line down to liquidity, the less the liquidity of the instrument
the more difficult it will be to get a fill

Right, I'm trying to gauge how much liquidity is enough liquidity to fill an order between the bid/ask. From what I read, some traders use daily volume as a metric, requiring at least 1,000 contracts as "liquid enough" to shave the spread. In practice, I don't know whether this is a relatively good/optimal metric. I've also heard the opposite - liquidity isn't too much of an issue as long as you leave the order up, as some market maker will eventually get around to filling your order.


DionysusToast View Post
You can try - but I can tell you what will generally happen...

Ok, this is what I was more or less expecting. Makes sense. As usual it comes down to the issue of urgency versus saving some money. Market makers are likely rather efficient at accounting for volume vs b/a as it is.

Still open to more comments/experiences if anyone has any. I appreciate the feedback thus far.

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It is my experience that - during the main trading hours and assuming stable trading conditions - you almost always get filled using a limit order in the middle between bid and ask or a little bit to your disadvantage.

Best regards, Myrrdin

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elynt View Post
Still open to more comments/experiences if anyone has any. I appreciate the feedback thus far.

All of the above said by the colleagues being correct, additional 2ct:

Before you start into options (on futures), reflect about some game theoretical effects that are typical of this market:
A) As futures, options are a zero sum (minus) game; minus because of transactions costs. Your gains is another one's loss and vice versa.
B) The options market is clearly structured: The sell-side is typically institutional, the buy-side retail. This effect grows with the distance from
the strike, since the retail bus is notoriously biased to out-of-the-money options.
C) The majority of options expires worthless.
A, B, C imply:
D) Options (presumably more than any other asset) represent is a steady flow of money from the (retail) buy-side to the writers, that is only
disturbed by extraordinary events so often.
So think if you want to be a buyer and / or a writer.


Concerning bid/ask:

Certainly, throwing away 1/2 of B/A is theoretically more reasonable than trowing away B/A.
But this view is myopic.

Limits at the mid point of B/A aim at the expected fair value of the option at a given moment.
If your counterpart is a market maker you are competing vs someone with
E) better tools and
F) normally much better estimates of probabilities (about the Greeks).
The ex ante expectation of getting fills at fair value is near zero since a market maker won't trade
if you don't cover his transaction costs plus his error margin plus - last but not least - his profit margin.
If the ex ante expectation of getting a fill is near zero this implies that the only scenarios why you would get a fill (ex post) are:
G) mispricings - once they were very common, but don't count on them if you need them; or simply
H) an adverse move of the asset: You get filled, because your midpoint limit is simply "old" at the moment of the fill and the
underlying has started a move that runs against your basic reasoning for the trade.
This implies:
You will get a fill in (almost) all cases when the underlying starts an unfavorable move (from your perspective).
The severity of this effect grows with your bias towards out-of-the-money options (you lose more faster, esp in percentage terms).
In (almost) all favorable cases you simply will be left without a fill, simple as that.

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myrrdin View Post
It is my experience that - during the main trading hours and assuming stable trading conditions - you almost always get filled using a limit order in the middle between bid and ask or a little bit to your disadvantage.

Best regards, Myrrdin

Thanks Myrrdin. If you don't mind me asking, how long do these orders take to fill and what daily volume do you see as a prerequisite to getting filled between the b/a?


choke35 View Post
All of the above said by the colleagues being correct, additional 2ct....

Thank you for the detailed response. I agree with your logic entirely. From someone who hasn't traded futures options, I would expect this to be the case. The issue stems from reports conflicting with this logic from those who trade options on futures (ex, see myrrdin's reply). As you mention however, filling between the bid/ask may be the result of negative price movement instead of genuine inside-spread filling, and the end result is misinterpreted by these traders.

I appreciate the earlier points you make, too. I didn't know that retail has such a preference for buying OTM options. Good food for thought.

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If you stick with only the most liquid products (ES, ZB, ZN, CL, 6A, 6B, 6C, 6E, 6J, CL, NG, GC, SI, ZS, ZW, ZC), the bid/ask spread is very small, usually 2-3 ticks or so during RTH, and getting filled in the middle is almost never a problem.

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elynt View Post
Thanks Myrrdin. If you don't mind me asking, how long do these orders take to fill and what daily volume do you see as a prerequisite to getting filled between the b/a?

Usually you will receive a fill within some seconds or - sometimes - some minutes.

As far as I know there are automatic robots which take care of your fill.

The daily volume is not so important. But there are options for which these robots do not work / are not installed.

Eg. in the ES you receive excellent fills for the first few expiry months, even if the daily volume for the specific option is low. (Still I usually trade the round figures, eg. 1500, 1550, 1600). For the later months it is more dificult to get a fill.

For the energies, there are good fills only during the day trading hours, whereas in the grains & beans you get quite good fills overnight. (I do not suggest to enter trades during the night sessions at all.)

In the meat markets, fills within the first hour of trading (8 am until 9 am Chicago time) often are not acceptable.

According to my experience you will receive acceptable fills for most of the commodities during the regular day trading hours (former pit hours). Other commodities (eg. lumber, orange juice, oats, copper) have a very small option volume, that I suggest not to trade them via options. You have to be careful with options with more than four or six months until expiry. For some of them it is easy to get fills (eg. grains), for others not (eg. ES).

Best regards, Myrrdin

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