flyhigher said:
I use options for directional betting for big caps. When my options move to deep ITM or OTM, i often found there are no bids in the market. Even though there are bids, the bid price is way out of theoretical value in favor of market makers. I do not have enough cash to exercise options to deliver the stock to close the positions, so the only thing i can do is to pray for someone coming to the market. Does the liquidity bother veteran traders here? How do you guys solve this problem?
Thanks in advance
Hello flyhigher,
Depending on your broker, you should be able to exercise an ITM option, and then buy/sell the requisite shares to balance the trade without actually having the capital to do so. If your broker won’t do this, fire them and find one who can. Alternatively, trade in sizes you can exercise.
Ok, if you’re trading the ASX “optionables”, there are two classes of trades – ones with market maker obligations, and ones without designated “flex” options. Entry and exit strategies include reading the trading of options, and knowing how the market maker works to finesse a good price. You really need very good T/A, good software and knowledge of options “Greeks” to do this.
You need a good options model adapted for the conditions, and need to project volatility movements fairly accurately – tricks I use include not entering on a break out day, but waiting for either a couple of small range or inside days when the volatility comes off if going long the option (buying not selling), and working out where the spread is, and figuring out if I am likely to get set around the centre of the spread or not based on the price action.
Also, I look to exit positions on strength, being stopped out for profit is not usually effective in less liquid options. Knowing how stocks counter trend is a key aspect to this, I am essentially projecting a time and price point I think the underlying will trade to, and entering at this point aiming for the underlying to then continue in the direction of the main trend, unless playing a short term counter trend play (or both and reversing positions trading the swings). Hence exiting on strength is a key element, plus trading in partial positions.
I do this in any time frame, if in the weekly, I buy more time, and the actual entry can range over days. As you can imagine, this is fairly technical, and there is a lot more to this…
Regards
Magdoran