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Is Market Auction Theory, Volume Profile, or MP better suited for certain instruments
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Is Market Auction Theory, Volume Profile, or MP better suited for certain instruments

  #1 (permalink)
Trading for Fun
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Is Market Auction Theory, Volume Profile, or MP better suited for certain instruments

My current day trading methodology is an amalgam of volume profile, Market Auction, and VWAP principles. My instrument of choice has been AAPL options. A couple of months ago I made the switch from trading weeklies to a little further out and deep-in-the-money. I just couldn't handle the high rate of time decay anymore. Initially it was a good switch, however recently I have come into a situation where the spread has become problematic.

I exclusively use market orders when entering/exit. During the high liquidity part of the day's open, the spreads are awful. For example this morning I had bought some calls on a break above VWAP, the market order was literally 1.40 above the bid. Horrible way to start a trade, especially given that it moved against me. In the past I had always found it difficult to time a limit order of the options with the chart of the underling where I want my entries/exits to match. With AAPL options, the bid/ask can move extremely fast.

At any rate, I was curious what everyone's thoughts were on this matter. I know of a few people having great success trading futures. They have a very structured system and have no issues putting in their orders at particular points in the chart that meet their auction criteria. I feel at times that with options, I'm having to juggle elements that take away from it being a similar "mechanical" trading experience. I mean think about it, with options I'm dealing with greeks, spreads, options writers, underlying stock, underlying stock's MM's, and on and on. I honestly can't recall anyone I've read on this forum or others who are using Volume Profile, MP, or MAT to trade options. Seems like it's exclusively a Forex/Futures thing.

Thoughts?

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  #3 (permalink)
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greenroomhoo's Avatar
 
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are you just trading options for the leverage or is there some other reason?

I will take options positions for other purposes and i never use a market order....but i am not day trading them like you are. I usually just try to split the bid-ask with my limits....particularly on less liquid names.

Why not just trade the underlying equity? AAPL has a high enough price to make the cost of trading 100 shares ($1/side) very advantageous?

The spread (and comms) on options has to be higher than just trading the shares?

I am not a mp expert but have been looking at it and invested a lot of time in it. I only look at the levels it generates because everyone else does. I am sure it applies to every other instrument because all it is a 30 minute bar chart all squished up. Volume profile applies the same as well.

Advantage of futures over equities: taxes and 24 hour electronic market (theoretically more transparency). No GAPS.
Advantage of Equities over Futures: high dollar names will have a lower implied cost for leverage depending on your futures comms. More choices of equities.
Advantages of Forex: 24 hour market, some tax attributes if trading in personal accounts, liquidity, LEVERAGE for small accounts
Disadvantages of Forex: Lack of centralized exchange. Brokers for retail people are effectively just bucket shops. Lots of horror stories (i had an account at PFG).

My trading is like my avatar: Big, Hairy, and Full of S$&T.
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  #4 (permalink)
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greenroomhoo View Post
are you just trading options for the leverage or is there some other reason?

I will take options positions for other purposes and i never use a market order....but i am not day trading them like you are. I usually just try to split the bid-ask with my limits....particularly on less liquid names.

Why not just trade the underlying equity? AAPL has a high enough price to make the cost of trading 100 shares ($1/side) very advantageous?

The spread (and comms) on options has to be higher than just trading the shares?

The whole reason for me day trading AAPL options was because I don't have a port large enough to trade the shares and have it make sense. Honestly the comms are not the issue. I trade in the money and I only need to a couple contracts to hit my daily goal if I correctly snag 1.5 to 2pts on the underlying. I only pay $1 per contract.

The problem of late has been the spread. It happened once again to me this morning when I started a position near the open. Just an awful fill, was like 1.30 above the bid. I've just grown so tired of it and it's really done some damage to my account the last month. Initially things worked out well when I made the switch to in the money options a couple weeks out or 1 month out. It eliminated my issues with the theta time decay that I had with the weeklies. But ever since AAPL has traded in such narrow ranges it's become a nightmare.

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  #5 (permalink)
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Futures Experience: Intermediate
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greenroomhoo's Avatar
 
Posts: 276 since Jun 2011
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why not trade micro forex instead then. Options...even liquid ones....dont seem to have enough liquidity to trust with market orders based on your experience alone.

I know market makers just play with the spreads on options. you can watch them do it. Pick an option with a bid ask and split the bid ask with a limit. I think the rule is that the market maker must hit that limit first before filling anything that is on the ask (buy limit in this example). If there are no other orders and the underlying is slow/flat...you will watch the bid get moved up to your buy order. As soon as you cancel the order, the bid will tick back down. I have done this over and over again trying to not pay up.




Rock Sexton View Post
The whole reason for me day trading AAPL options was because I don't have a port large enough to trade the shares and have it make sense. Honestly the comms are not the issue. I trade in the money and I only need to a couple contracts to hit my daily goal if I correctly snag 1.5 to 2pts on the underlying. I only pay $1 per contract.

The problem of late has been the spread. It happened once again to me this morning when I started a position near the open. Just an awful fill, was like 1.30 above the bid. I've just grown so tired of it and it's really done some damage to my account the last month. Initially things worked out well when I made the switch to in the money options a couple weeks out or 1 month out. It eliminated my issues with the theta time decay that I had with the weeklies. But ever since AAPL has traded in such narrow ranges it's become a nightmare.


My trading is like my avatar: Big, Hairy, and Full of S$&T.
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  #6 (permalink)
Trading for Fun
Scottsdale
 
Futures Experience: Intermediate
Platform: ThinkorSwim
Favorite Futures: Stocks
 
Posts: 120 since Feb 2012
Thanks: 33 given, 96 received


greenroomhoo View Post
why not trade micro forex instead then. Options...even liquid ones....dont seem to have enough liquidity to trust with market orders based on your experience alone.

I know market makers just play with the spreads on options. you can watch them do it. Pick an option with a bid ask and split the bid ask with a limit. I think the rule is that the market maker must hit that limit first before filling anything that is on the ask (buy limit in this example). If there are no other orders and the underlying is slow/flat...you will watch the bid get moved up to your buy order. As soon as you cancel the order, the bid will tick back down. I have done this over and over again trying to not pay up.

I definitely need an instrument where I can place an order at the level I want. I'm sick of having to wait for the level to hit and then market ordering. It's nearly impossible to time the level with the actual option price.


Last edited by Rock Sexton; February 21st, 2013 at 01:37 PM.
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