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It is true that creating a true mechanical option trading system is
difficult, even with the best of option software (snide remarks about a
well-known product deleted here). Historical option data are fragmentary at
best, and give only insufficient information on many aspects such as bid/ask
prices and sizes etc. Furthermore, there are many different strategies, with
possible readjustments regularly occurring during the life of an option
position, plus additional intricacies such as early exercise and assignment
etc.
However, all is not lost. Now this may come as a surprise to some, but if
you trade options, you never look at an option chart, anyway. You trade the
underlying *using* options; the chart of the underlying is what you watch
(plus the option price on your order entry screen). Although I trade options
professionally every day, I doubt that I have looked at as many as three
option charts during the past six months.
So if you want to use an S&P trading system of your own design, you could
keep trading it with very little change. You'd simply buy at-the-money calls
when your system goes long, or buy at-the-money puts to go short. To exit,
sell them back. Simple, isn't it?
As regards liquidity, the volume figures you are seeing on that website may
be a bit deceptive. They tell you about the trades that actually happened.
They don't tell you anything about the depth of the market at any given
time, which may be much greater. As I am writing this, in a very dull
pre-holiday market, the depth of the QQQ July 43 puts is more than 6000
contacts on *each* side which should accommodate most traders unless they
are moving really large sizes; and even then, by giving up a few ticks, size
can usually be handled. I have attached a gif for you to verify this.
Slippage is a fact of life in all markets, so also in options. However, it's
not as bad as you might think. Suppose you bought some at-the-money calls
with very little slippage because of the narrow B/A spread there. Suppose
further that the market has gone up some four strikes and your calls have
become quite illiquid. Will you be seen worrying about the "horrific
slippage"? I assure you, you will be only too happy to give up some slippage
to pocket the huge profit (4 strikes!) that you have made. OTOH, if you have
let your position deteriorate to a 4 strike move against you, the option
will have lost so much value anyway - possibly almost the entire premium -
that it will hardly matter whether you get a few ticks more or less when,
much too late, you finally sell it back.
As regards your concern about being inadvertently stopped into a position -
with options, you normally wouldn't use entry stops on the option itself;
instead, you might want to use contingent orders ("if underlying hits 44,
buy twenty of those puts"). In the electronic markets, however, you would
only use limit or stop limit orders on the options prices themselves; at
least that's what I do, for the very reasons you mentioned. Of course, a
good order entry system is required for that.
There are a few more things that I am sure you know about. One important
point with options is time decay. If the trader intends to stay in a
position for days or weeks or even longer, that has to be factored into the
equation. For instance, it might be advisable to get into some spreading
strategy to defray the costs of time decay through the sale of other
options. Another thing to be factored in would be volatility. But in day
trading the OEX or QQQ, these considerations can usually be disregarded. The
only thing a day trader has to get used to is the delta of about 50% for the
at-the-monies, which, as you know, means that the option gains/loses half a
point for every full point move of the underlying.
Best,
Michael Suesserott
-----Ursprungliche Nachricht-----
Von: Gary Fritz [mailto:fritz@xxxxxxxx]
Gesendet: Monday, July 02, 2001 18:54
An: Omega-List
Betreff: Re: AW: Re[2]: Globex2 in home
> to obviate the risk of the market spikes you mention, have you
> considered trading options instead of the underlying? QQQ and OEX
> have sufficient liquidity, and, as you are no doubt aware, any long
> option comes with its own automatic stop built-in (the premium
> paid).
I've definitely considered it. I have very little experience in
options and I haven't been able to understand things well enough to
be comfortable with it. I.e. it's difficult to get sufficient data
on all the strikes to rigorously test how a system would have
performed with puts/calls instead of futures, what would the
entry/exit costs have been considering liquidity & slippage, things
like that.
I question your liquidity comment. When I've looked at it, QQQ and
OEX had decent liquidity on a daily level, but not on a moment-to-
moment basis.
I can't get Quote.com LiveCharts (my only source of live options
charts) to behave at the moment, but when I've looked in the past,
the MOST active options showed a volume of maybe 300-500 per hour on
the CBOE website. And when I checked them in a chart, I found there
were typically only 2-3 *trades* per hour, each of which was a large
block.
And that was for the most active strikes. What do you do if you
enter a trade on an active strike, then the market moves in your
direction for a few days? Your put or call is now much less active.
Seems to me the slippage would be horrific.
Also, the "money management stop" of the premium paid is not the only
concern I have with the minis. You also have to be careful about
getting stopped INTO a position you didn't want, and at a horribly
bad price. E.g. on 6/22 the NQ spiked 75 pts in a minute due to
rumors from the Mideast. I happened to have an short signal at 1740.
If I'd had a resting stop in Globex, I probably would have gotten
filled near the bottom of the spike at 1672. Instead, I waited for a
minute and got filled at 1740 like I wanted. (The trade still went
sour, but not as bad as it WOULD have if I'd been filled at 1672!! :-)
> BTW, I like your expression, "air pockets of liquidity"! Quite
> descriptive, and somewhat poetic, too.
Can't take credit for that one. I've heard others use it quite a few
times.
Gary
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