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>However, the tables will be turned for a trading system that stays in the
>market overnight<
Mike:
I like options sometimes, I'm not trying to rain on your
parade, but in the NQ you can have stops in overnight,
and/or get out as the market allows (except on Friday-Saturday).
In some cases the NQ might have an advantage overnight.
BTW, ever used a tight stop on an option? It's usually not
fun.
Just MHO,
BW
>From: MikeSuesserott@xxxxxxxxxxx (MikeSuesserott)
>To: <fritz@xxxxxxxx>, "Omega-List" <omega-list@xxxxxxxxxx>
>Subject: The bugaboo of ITM option illiquidity
>Date: Tue, 10 Jul 2001 17:15:31 +0200
>
>Gary,
>
>let me preface this by stating that I am not advocating day trading QQQ
>options in the same sense that one would be scalping the NQ for a quick 10
>or 20 points profit. QQQ options do lend themselves very well to short-term
>trading from, say, a 30-min. chart, holding a position for several hours to
>a few days, but not to scalping.
>
>Fortunately for the QQQ traders, slippage is not as bad as you indicate in
>your post. However, it does exist, and an honest appraisal is in order. Let
>us go through the QQQ vs. NQ numbers together, step by step, and try to
>work
>out the correct scale.
>
>(1) With current prices, any 1-point move in the QQQ corresponds to about a
>40-point move in the NQ (actually that number is about 40.8, but let us use
>40 here for the sake of simplicity).
>
>(2) How much is a 1-point move worth per share or contract? In the QQQ, 1
>point is worth $1 per share, just like in any other stock. Since one stock
>option is the right to buy or sell 100 shares, a 1-point move in QQQ
>*options* is worth $100 per option contract. In the NQ, 1 point is worth
>$20
>per futures contract.
>
>(3) It follows that one tick in QQQ options (0.05 points) is worth $5, and
>one tick in NQ futures (0.5 points) is worth $10.
>
>To avoid introducing any bias into this analysis, let us apply the above
>numbers to a scalping situation in which the options can't play their
>strengths. Suppose we buy 5 NQ contracts, make a quick profit of 20 points
>in the NQ, and exit with a gross profit of 5x20x20=$2000. Average slippage
>would be 2 ticks per round turn per contract, which amounts to 10 ticks or
>$100 for 5 NQ futures.
>
>Now for the QQQ. Because of (1), the 20-pt. move in the NQ corresponds to a
>0.5-point move in the QQQ. And because of (2), for the QQQ trade to be
>equivalent, we would have to buy 4000 shares in order to make the same
>$2000
>profit on a half-point move in the QQQ. But since we want to do options,
>and
>one option controls 100 shares, we would have to buy 40 QQQ options
>instead.
>
>We are almost done, but still have to take option delta into account. An
>at-the-money option will move only about half a point for every full point
>move in the QQQ stock; thus, for a fully equivalent trade we would have to
>buy 80 QQQ options, make a profit by having the underlying QQQ stock move
>half a point, and exit. According to (3), average slippage per round-turn
>would be 2x80 ticks, or $800. This is 8 times the average slippage we would
>experience in the NQ. Not 100 times as much, but still a lot.
>
>However, the tables will be turned for a trading system that stays in the
>market overnight, or goes for larger profits. Then the increased slippage
>of
>options is perceived by the option trader to be the fair price for their
>built-in protective qualities.
>
>Best,
>
>Michael Suesserott
>
>
> > -----Ursprungliche Nachricht-----
> > Von: Gary Fritz [mailto:fritz@xxxxxxxx]
> > Gesendet: Monday, July 09, 2001 23:35
> > An: Omega-List
> > Betreff: Re: The bugaboo of ITM option illiquidity
> >
> >
> > > With QQQ at 42, the July 46 call (4 strikes out-of-the-money) has
> > > a B/A spread (slippage) of 1 tick,
> >
> > But that 1 tick is the difference between $0.25 and $0.30 --
> > percentage-wise that's an ENORMOUS spread. If I scale that up to NQ-
> > equivalent prices, that's like having a b/a of 1545 / 1854 in the NQ!
> >
> > Unless I've grossly misunderstood something, you're never going to
> > replace futures trading with a spread like that. If you're only
> > buying the call as insurance with no intentions of trying to make a
> > profit on it, that might be a lesser concern, but...
> >
> > > The 38 calls (4 strikes deep in-the-money) show a market depth of
> > > more than 5000 on each side, with a B/A spread of only two ticks...
> > > Though the B/A spread [ on the July 32 call] has widened to 4 ticks...
> >
> > Those spreads are much more reasonable -- 2.2% and 1.9% respectively.
> > But it's still almost 100x bigger than the typical 1-tick (0.5-
> > handle) spread in the NQ.
> >
> > So even with the smaller 2% spreads, that's still the equivalent of a
> > 35-handle cost in the NQ. I don't think you'd want to try to trade
> > the QQQ options in place of the futures, with costs like that. But
> > you said in a previous note that you COULD use the QQQ and OEX for
> > day trading of options. If you can make money with a 35-handle (or
> > worse) penalty, you're a better trader than I am.
> >
> > What am I misunderstanding here?
> >
> > Gary
>
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