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>From Hubert Lee's Option Fool. Info @ http://www.optionfool.com/
JW
abprosys@xxxxxxx
----------
> From: Hubert Lee <optfool@xxxxxxxxxxxxxx>
> To: optionfools@xxxxxxxxxxxxxx
> Subject: Bids and Asks
> Date: Thursday, August 28, 1997 9:50 AM
>
> Folks: Here is a requested reprint on bid/asks and a floor
> trader's response to the issue. The Q&A is old, so please
> excuse the Unabomber joke in it.
>
> Topic: Bid-Ask Updates
>
> Dear Option Fool:
>
> How often are bid/ask spreads updated on options with
> open interest but little activity ? I don't trust market
> orders so I place limits within the spread, but as soon as
> it gets to the floor, I find that the spread has moved away
> from me. Am I paranoid or does the floor react to my
> offer by moving away?
>
> Limit Order Or Nothing Is Executed
>
> Dear L.O.O.N.I.E. (just kidding!):
>
> The different option exchanges have their own rules
> about keeping published bid/ask information current.
> Call them for the specifics (start with the CBOE hotline
> at 1-800-OPTIONS). Generally speaking, the quotes you
> see on your machines should reflect good, "ten-up"
> markets (i.e. you'll probably be able to fill a ten-lot by
> hitting the published bid or offer price).
>
> Experienced traders will often claim that the specialist
> "moved on them" when their orders were presented. I
> have heard through the years all sorts of conspiracy
> theories of how one was ripped off by "the floor". (I'm
> sure that the Unabomber must be a frustrated option
> player.) Such ideas are, of course, nonsense. Gouging a
> teenie on your five lot is not going to buy any of those
> boys lunch even (ever see a booth dive on a couple of
> pizza pies?)
>
> Option Fools are advised to keep an eye on the store,
> however. Things do get wild on the floor and, at times,
> the investor is his own best advocate. I am reminded of
> the time I tried to calm a boisterous client. Armed with
> time and quote printouts, the gentleman spent most of the
> day yelling in my ear about how he was "screwed by the
> floor". One of his many contentions was that the bid-ask
> spread was wider than allowed by exchange rules.
> Finally, exhausted by the harangue, I sarcastically
> suggested that he take the case up with the governors of
> the exchange. That settled that, or so I thought. A few
> days later, my order department told me that they had
> been on the phone for hours with the exchange officials
> and floor specialists trying to work out a price change of
> a sixteenth. Boy, was I embarrassed! I'll keep my
> sarcastic referrals to my self from now on ;).
>
> Getting back to your question, the effect you speak of is
> usually restricted to inactively traded options only. If an
> option is bid 3 to 3 1/4 with little open interest and no
> volume so far, you can be assured that if you place an
> order to buy 20 contracts at 3 1/8, you will not get a fill.
> The new quote (say 3 1/8 to 3 3/8) will reflect your bid.
> There is nothing suspicious in this. No one wanted to
> sell you the contracts at your "in-between" price and,
> indeed, no one is at all obligated to. In a more active
> market (say the OEX or a very active equity option), you
> stand a much better chance of a fill.
>
> Here are some tips for dealing with the bid-asks in
> certain situations:
>
> Don't assume that anything is wrong if the quote does
> not reflect your bid right away. You don't always want it
> to. In the above example, a cagey floor trader may reveal
> your 3 1/8 bid to the crowd but ask not to have it
> reflected. He is trying to scope things out first without
> revealing your hand. (This is why savvy Option Fools
> may use "Not Held" orders on larger quantities.) By all
> means ask your broker if your bid doesn't show up after a
> while, but that is what may be going on for bigger lots.
>
> Don't blow the play for an extra eighth. There is a
> saying on my option desk, "Pay now or pay more later".
> It is common for any rep to see a client who needs to
> close out a trade try to eke out an extra tick by placing an
> in-betweener on an inactive option. His need to trade is,
> of course, tipped off to the entire world. As the market
> moves away, the trader may try to chase it with another
> bad limit. By the end of the day, the trader winds up
> paying a half or so more than what he would have with a
> plain market order in the first place. Don't outwit
> yourself. Is a market order so bad?
>
> On the really inactive options, call your broker for a
> "floor quote with size". They'll come back with the true
> market. Please don't do this frequently or frivolously,
> however. The boys will tire rapidly of being run around
> on the floor.
>
> Keep an eye out on the underlying issue as well. If there
> is a drastic change in the stock and no move in the
> option, don't get freaked out if your order is met by a
> shift in the quote. Things sometimes just need to catch
> up.
>
> Don't forget that restricted orders have no standing.
> That is, orders with AON, minimum size, or other such
> restrictions go behind market orders and may not be
> entitled to any trades you see on the ticker.
>
> Once again, call for the exchange procedurals on the
> matter. Ask what the quote timeliness rules are, as well
> as the floor procedures for size markets (ten-up, etc.),
> opening rotations, and any other things that concern you.
>
> Options are challenging enough without the handicap of
> ignorance. Learn all you can before you put your hard-
> earned (or ill-gotten, whichever the case may be!) cash
> on the line. Information = Power = Make Your Account
> Last Longer. After all, isn't that why you're on the ASK
> THE OPTION FOOL mailing list?
>
> Good Luck! Hubert Lee, The Option Fool
>
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