Bid and ask price rigged (need help)

drumzwizard said:

Hi,

My question relates to the bid/ask price when trading index options on the XJO. On the 1/7/09, I decided to trade an intraday put option as there had been a big downfall on the DJI and FTSE overnight, hence, the XJO usually follows in the direction of these indexes. I entered a first in the money put option with open interest of 4000 at approximately 10:05AM. After I entered, the index kept falling in the direction predicted, but the bid/ask price did not change from when I first entered the option. I am under the presumption that the bid/ask price must move in your favour if the index moves in the direction predicted? As you can see, it was a massive move on that day but I still came out a loser as the bid/ask price barely increased, despite getting in early before the large move was made. In fact, the bid/ask moved against me despite guessing correctly.

The bid/ask seems to move downwards MUCH quicker when the direction of the index moves against me and its hard to make a profit. On the other hand, when the index moves in the direction predicted it moves barely or slightly. In terms of accuracy, I nearly have a 100% success rate in anticipating which way the index will move, but the bid/ask price does not reflect the direction of the movement, and hence, I am losing money despite my high accuracy rate. It seems to be rigged. Can anyone help?

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drumzwizard said:

Hi,

My question relates to the bid/ask price when trading index options on the XJO. On the 1/7/09, I decided to trade an intraday put option as there had been a big downfall on the DJI and FTSE overnight, hence, the XJO usually follows in the direction of these indexes. I entered a first in the money put option with open interest of 4000 at approximately 10:05AM. After I entered, the index kept falling in the direction predicted, but the bid/ask price did not change from when I first entered the option. I am under the presumption that the bid/ask price must move in your favour if the index moves in the direction predicted? As you can see, it was a massive move on that day but I still came out a loser as the bid/ask price barely increased, despite getting in early before the large move was made. In fact, the bid/ask moved against me despite guessing correctly.

The bid/ask seems to move downwards MUCH quicker when the direction of the index moves against me and its hard to make a profit. On the other hand, when the index moves in the direction predicted it moves barely or slightly. In terms of accuracy, I nearly have a 100% success rate in anticipating which way the index will move, but the bid/ask price does not reflect the direction of the movement, and hence, I am losing money despite my high accuracy rate. It seems to be rigged. Can anyone help?

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wayneL said:

skc and skyquake are bang on the money.

Think about if you took Cartman's suggestion and were trading SPI futures instead of XJO options. Where the index will trade once all stocks have opened at 10:10 or whatever it is, is largely already priced into the futures.

The opening print on the XJO and everything up to when all stocks are open is completely illusory. It's not real. It just a function of the staggered open.

Option market makers, being the cleversides they are, are also privy to this knowledge. They ain't giving away money by pricing the options at an illusory level.

You have to look at the futures.

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skc said:

If this guy has no idea about staggered open - which is in the fundamental newbie must-know 101 category - how can you tell him to listen to Cartman and go trade the index future!

He will become the Kenny to the Cartman - gets killed every episode.

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wayneL said:

Think about if you took Cartman's suggestion...

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Rockon2 said:

SKC,, go and read his question again,, its got nothing to do with staggered open...

He cant figure why he gets offered a crappy price when buying a Put Otion on the open....and then when the mkt goes in his predicted direction , his ETO doesnt...

I Repeat... Go and figure how a writer of an ETO makes money... then all shall be revealed

drumwizard, your welcome to PM me for more info.

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wayneL said:

Eh?

I think you should read my post again, viz:

Think about if you took Cartman's suggestion and were trading SPI futures instead of XJO options. Where the index will trade once all stocks have opened at 10:10 or whatever it is, is largely already priced into the futures.
....
You have to look at the futures.

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This was so that he could understand how the options were being priced in the specific situation i.e. during the staggered open.

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Rockon2 said:

SKC,, go and read his question again,, its got nothing to do with staggered open...

He cant figure why he gets offered a crappy price when buying a Put Otion on the open....and then when the mkt goes in his predicted direction , his ETO doesnt...

I Repeat... Go and figure how a writer of an ETO makes money... then all shall be revealed

drumwizard, your welcome to PM me for more info.

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Rockon2 said:

What he doesnt seem to understand is that the the option writers will only sell him an option at a price based on Privy knowledge as WayenL points out in his post at 2.44 am... In fact they will generally price it lower, in the hope that the taker gets frustrated (as in drumwizards case ) and exits the trade thus making money for the writer...

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Trembling Hand said:

Nonsense. They are just priced against the Futs not the XJO. Only games they play are a wider spread at the start of the day.

Privy knowledge good one

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Rockon2 said:

In fact they will generally price it lower, in the hope that the taker gets frustrated (as in drumwizards case ) and exits the trade thus making money for the writer...

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Rockon2 said:

Correct, Trembling Hand,, But its not my quote, its wayneL's ...

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Rockon2 said:

Index's.. especially intra day are best done on futures or market makers (cfd's) .... and then you have to work most of it at night for the bigger moves imo....

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jackson8 said:

hi all

as an observation from watching the options market open and throughout the day i have noticed that early oppie prices seem to be higher in the morning upon the open , given that the sp price may not change much during the day the oppie prices seem lower as the day progresses

could it be that a higher volatility is priced into them on open after a dramatic move overnight , once the market settles the vol may come down

on occasion i have sold puts on open to find that even though the sp at end of day may mirror that of when i took earlier position the price of the opy has decreased.

my point being drumzwizard may have purchased a position with high iv built in which then collasped therefore taking any profit from the position

gary

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