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Ray,
Regrettably options have more myths about them than almost any other security.
It is clearly the one investment product where the really well educated have a
clear edge. It just means job security and wealth for the folks who know how to
trade!
RAY RAFFURTY wrote:
> Hi Doc,
>
> Thanks for the lengthy explanation. There is a lot of mythology floating
> around to explain what happens in the market. It often reminds me of my
> collage Physics professor. The would often refer to his "Little Demon"
> theory. It went something like this: He would ask something like "Why a
> does light from a distant star seem to bend around our sun?" The students
> would sit there without a clue. He would then ask rhetorically "Did a little
> demon push it?" and then go on to explain Relativity.
>
> A few weeks ago I had the following experience: I was long some OEX
> options, but the trade had not gone well and they where trading below my
> entry point, but about 3/4 above my stop. A couple of minuets after the
> close in N.Y., I noticed the price of the option moving down. There was no
> particular news, but it was defiantly moving. Shure enough, it was hit and
> I was taken out at the option's low of the day. The price then reversed and
> moved up 3/4 point to where it was at the N.Y. close. The next day the
> market moved in my direction and I had to reenter at a higher price.
>
> Right now, someone is saying "That proves they ran your stop!" Others are
> saying "See, you should never use stops!" I just say "A little demon got
> it!" And, right it off to the overhead of doing this business.
>
> Have a great weekend everyone.
>
> Good luck and good
> trading,
>
> Ray
> Raffurty
>
> ----- Original Message -----
> From: THE DOCTOR <droex@xxxxxxxxxxxx>
> To: ROBERT ROESKE <bobrabcd@xxxxxxxxxxxxx>
> Cc: <realtraders@xxxxxxxxxxxx>
> Sent: Thursday, August 12, 1999 7:15 PM
> Subject: Re: OPTN: How can they do that?
>
> > The way RAE's works, currently, is that the market makers can chose to
> sign on
> > or chose not to. There are a series of rules about signing off and the
> > obligation to be on during expiration, but for the moment I'll keep it
> simple.
> > In essence the system turns a wheel with market maker names. So if there
> are 5
> > market makers signed on the first RAEs trade goes to a randomly selected
> market
> > maker. Then that market maker will get hit with every fifth order. They
> do not
> > receive a message saying "ORDER TO BUY" but rather a message saying "YOU
> BOUGHT
> > XXXXXX". It is done in this fashion for the obvious reason of fairness.
> Now
> > once they have been hit the crowd can choose to change the quotes. At
> CBOE
> > virtually every quote comes from an auto quote system. This is why if you
> are
> > watching an option chain of quotes you will see the "cascading" waterfall
> effect
> > when the quotes change.
> >
> > Auto quote takes a volatility from the crowd(they physically input it)and
> from
> > that vol. drives all the quotes. Now some things to understand. The
> crowd does
> > not have to use the same vol. for every series.....so for example they can
> > skew(higher volatility)OTM index put options. The auto quote system
> drives from
> > the crowd volatility and the last price of the stock/index from the quote
> > vendor. There is even a wrinkle here ... auto quote used to drive off
> every
> > trade in the stock/index. This became a capacity nightmare in some very
> > volatile issues like an AOL or YAHOO. So in very volatile issues the
> system may
> > be set to sample only every 5th print in the underlying ... otherwise the
> pipe
> > of quote would get jammed almost all the time.
> >
> > RAEs fills off of the broadcast quote and the fill is untouched by human
> > hands(rules are different at some of the other exchanges where some
> traders get
> > a second look before they fill). We have filed with the SEC to increase
> RAE's
> > floor wide to 100 contract, although it is unlikely that you would want or
> see
> > 100 up in equities. There are clearly some challenges with technology.
> If I
> > had to set my trading to autopilot might I enforce a b/a spread that is
> actually
> > larger than circumstances require? In reality RAEs and other electronic
> systems
> > give you instant gratification and maybe that is not always the best
> available
> > market .... there is a cost to instant gratification.
> >
> > Some other issues .... the crowd can choose to take an option series off
> of auto
> > quote. So they might leave the back months on and the deeps and the cheap
> in
> > the front month, but trade the ATM series manually. They will do this in
> very
> > volatile issues.
> >
> > Also currently the automated systems are only available for customer
> orders.
> > Brokerage firms trading for their own account and market makers cannot use
> RAEs.
> >
> > There is also an electronic order book, visible to the floor, at CBOE.
> The
> > electronic book, like RAEs, is currently only available to customers. The
> book
> > has trade priority, except for spread trades. Many on-line account are
> actually
> > just routing directly into the CBOE order routing system. Market
> > orders(currently 20 or less {except in DJX and interest rate options where
> the
> > amount is higher})go directly to RAEs, limit order more than 2 ticks away
> from
> > the disseminated market go to the E book, other orders print (physically
> or
> > electronically depending on the firm)in the trading crowd where a floor
> broker
> > handles the order. At CBOE Floor brokers cannot trade for their own
> account...
> > a separation of agency and principal. So if you are the Schwab broker in
> AOL
> > ... all you can do in AOL is fill.
> >
> > Hope this helps,
> >
> > If you are ever in Chicago and want a tour of the floor call me at CBOE at
> 1 800
> > OPTIONS and then wait for the operator and ask for extension 7843... or
> shoot me
> > an e mail. I'll stand you up in the OEX pit or the AOL crowd, both can
> get
> > pretty wild.
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