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> Did anybody notice this with options on TBR (Telebras - fairly active options on this ADR). The ba was tight all morning after TBR opened down about
> 4. I think that the market makers had a chance to get short on this one and were hedged for the morning as it stayed down about $4-6. Afternoon it
> started to bottom and turn back up -- this is when ba started to widen way out. My guess is that the market mkrs were having trouble unwinding
> hedges and couldn't take on the risk as the ba went out to as much as 1/2 on options on the 110 Dec call 1/2-1 and they were caught slightly short.
> Does this sound like what anyone else is seeing (DR?) in this or other stocks.
>
> -----Original Message-----
> From: THE DOCTOR [SMTP:droex@xxxxxxxxxxxx]
> Sent: Monday, December 08, 1997 10:15 PM
> To: RealTraders Discussion Group
> Subject: Re: OPTIONS Bid+Ask
>
> There are a number of factors that determine option bid ask spreads,
> however they alll tie into the ability of the floor trader to hedge.
>
> First there are legal limits at every range of prices as set by exchange
> rules. In almost all instances these limits can default to the limit
> oof the underlying security. So if a stock or basket had a $3 b/a the
> option could have a $3 b/a.
>
> B/A's are set by the trading crowd or specialist depending on the
> exchange. A limit order could change(improve )the b/a assuming it had
> no qualifiers that prohibited it being shown on the screen. For example
> an AON to buy 50 contracts could not be shown on the screen because ,
> for example, a 10 lot to buy could not be filled by a 50 lot AON.
>
> At almost all exchanges, for almost all options an autoquote system
> exists which prices the options and is set to a b/a default with some
> parameters.
>
> For example 0 - 3 set at 1/8.....3+ - 5 set at 1/4, above 5 set to
> stock b/a or 3/8 whichever is greater.
>
> The b/a is also for a specif size(which varies based on pit culture)but
> for no less than 10 contracts. Large orders can, and often will be,
> done outside of the b/a.
>
> There are different rules about customer priority. At CBOE we have a
> customer orderbook which has priority over all trades except
> spreads(which is why trading at a spread as a spread is often
> superior(actually abouut 2/3 of the time it is better). So a book limit
> could be touched by a spread and the book limit order not trade.
>
> You have a booked limit to by at 2 1/2. A print occurs at 2 1/2 but it
> is not you. WHY? It was part of spread and to facilitatre the spread
> one side was done at 2 1/2...since the spread is noot sensitive to the
> "absolute" value of an option it can touch the bbok on one side.
>
> Thhere is often a pit market better than the screen. Remember if the
> pit committment is say 100 contracts they might display a quote which
> represents their committment....a better quote might exist for 5's and
> 10's. This is the kind of activity that has evloved in instruments like
> SPX and DJX where the screen quotes are for a size of greater than 10
> contracts.
>
> In declared fast markets....BE VERY CAREFUL.....as most ATM and ITM will
> default to legal maximums.
>
> Be especially careful of put b/a when markets are down and it becomes
> difficullt or impossible to short "listed" stocks. No upticks
> essentially means no ability to hedge so...mark the puts up enough to
> try to bring in natural sellers. If I can't short stock..I can't build
> puts so I only want to sell themm if you make me...and the only way to
> make me is to pay up. This by the way is one of the primary reasons for
> vol skew. Not the only reason.
>
> I think I got to alll your points or at least I hope so because a finger
> I use for typing just fell off.
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