Calculating risk with large bid ask spreads? - futures io
futures io



Calculating risk with large bid ask spreads?


Discussion in Options

Updated
    1. trending_up 110 views
    2. thumb_up 2 thanks given
    3. group 1 followers
    1. forum 1 posts
    2. attach_file 0 attachments




Welcome to futures io: the largest futures trading community on the planet, with well over 150,000 members
  • Genuine reviews from real traders, not fake reviews from stealth vendors
  • Quality education from leading professional traders
  • We are a friendly, helpful, and positive community
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts
  • We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

(If you already have an account, login at the top of the page)

 
Search this Thread
 

Calculating risk with large bid ask spreads?

(login for full post details)
  #1 (permalink)
 Tuglife 
Escondido CA USA
 
Experience: Beginner
Platform: Jigsaw Daytradr + Ninjatr
Trading: E-Mini ES
 
Tuglife's Avatar
 
Posts: 123 since Jan 2020
Thanks: 60 given, 119 received

I just watched an informative video about selling credit spreads on VIX futures. There was an element about the video I don't understand. The host was explaining his strategy, Sell X, buy Y. But in his example, the prices he used were both "ask" quotes. The "bid" quotes were quite different, of course.

So there is the meat of the question. When calculating an options position, even a naked put or call, how does one calculate risk if the entry price is uncertain?

And also, what is the best order execution method? I have only bought a few calls in my career and I simply used limit buy orders and walked them up, starting at the "bid" quote on my platform.

Visit my futures io Trade Journal Started this thread Reply With Quote

Can you help answer these questions
from other members on futures io?
Move SL or TP with pointer and keys
NinjaTrader
NT8 - Footprint Chart adding on code
NinjaTrader
Hey! Is there a way to change the date and symbol on a c …
EasyLanguage Programming
Pinescript to EL conversion - ema cloud indicator
TradeStation
use of Ultimate Oscillator in NT8
NinjaTrader
 
Best Threads (Most Thanked)
in the last 7 days on futures io
Spoo-nalysis ES e-mini futures S&P 500
12 thanks
Cycle Analysis... a way of looking at price action.
8 thanks
Want your NinjaTrader indicator created, free?
7 thanks
Basic Education for Beginner Trader
7 thanks
TST/OneUp/LeeLoo/Earn2Trade
4 thanks
 
(login for full post details)
  #2 (permalink)
 SMCJB 
Legendary Market Wizard
Houston, TX
 
Experience: Advanced
Platform: Trading Technologies
Broker: Primary Advantage Futures. Also ED&F and Tradestation
Trading: Primarily Energy but also a little GE, SI, Bitcoin & Ether
 
Posts: 4,557 since Dec 2013
Thanks: 3,883 given, 9,173 received

Good Question.

Bid-Ask spreads in options are often a significant cost of trading as they are often much wider than the underlying product. Factor in that these products also have smaller delta's and you often need a much bigger price move to just cover the spread.

In terms of risk, if you entered the position and then immediately closed it with no market move at all you would expect to lose (ask-bid+commissions)*2. Now consider the following hypothetical situation. Stock is trading $100 and you buy the ATM Call. If the stock goes to $99 you stop yourself out and if goes to $103 you take profits. Hence you think you have a 3:1 reward to risk ratio. Assuming 50% delta, if stock goes to $99 you lose $.50+(ask-bid+commissions)*2 and if stock goes to $103 you make $1.50+(ask-bid+commissions)*2. If bid-ask + commissions is actually say 10c this becomes -$.50-$0.20 = -$0.70 and $1.50 - $0.20 = $1.30. hence your 3:1 reward to risk trade is actually 1.85:1! Obviously only hypothetical, but hopefully a good illustration.

Reply With Quote
The following 2 users say Thank You to SMCJB for this post:


futures io Trading Community Traders Hideout Options > Calculating risk with large bid ask spreads?


Last Updated on June 16, 2022


Upcoming Webinars and Events
 

NinjaTrader Indicator Challenge!

Ongoing
     



Copyright © 2022 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, Ph: +507 833-9432 (Panama and Intl), +1 888-312-3001 (USA and Canada), info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts