Hi all,
I have just opened an options trading account with Commsec.
Now I wanted to buy a put option. However when looking at the series (and this is a large blue chip stock) the spreads are large (for the premiums) and with the liquidity it looks like it will be very hard for me to close any sort of position on these options contracts (was looking at BHP and MQG - December). With these large spreads as a newbie it is hard for me to gauge the impiled volatility of the market and therefore it is hard for me to work out a fair price that I should bid for these options.
My question is how do options traders trade on ASX options with these liquidity constraints? Surely they pose risks (i.e unable to closeout).
Sorry,
I just realized I didn’t really answer your question, as far as spreads go they are the tightest at the money on the biggest stocks and the XJO index, as you go away from the money in becomes a pain. Market makers will be selling you high IV which could be a problem when you’re buying options. If the underlying moves in your predicted direction but volatility drops off you still may not make a profit.
Hi all,
I have just opened an options trading account with Commsec.
Now I wanted to buy a put option. However when looking at the series (and this is a large blue chip stock) the spreads are large (for the premiums) and with the liquidity it looks like it will be very hard for me to close any sort of position on these options contracts (was looking at BHP and MQG - December). With these large spreads as a newbie it is hard for me to gauge the impiled volatility of the market and therefore it is hard for me to work out a fair price that I should bid for these options.
My question is how do options traders trade on ASX options with these liquidity constraints? Surely they pose risks (i.e unable to closeout).
to add to that iv's are quit high at the moment so you are paying a very high premium and will need a big move to realise a profit . aleckara are you considering itm atm or otm purchase.
Hello again,
If you’re buying a put as a purely protective position I guess liquidity at expiry is not much of an issue. If the option is in the money at expiry you can always exercise the contract rather than close it. The only problem is the huge exercise brokerage comsec charges.
Sails, please correct me on this if it isn’t right.
Hello again,
If you’re buying a put as a purely protective position I guess liquidity at expiry is not much of an issue. If the option is in the money at expiry you can always exercise the contract rather than close it. The only problem is the huge exercise brokerage comsec charges.
Sails, please correct me on this if it isn’t right.
Thanks everyone.
I wasn't looking at anything particular in terms of ATM, ITM, OTM. I was only looking at out-of-the-money puts because I figured that if the spot price went to this price all the liquidity would be here and I would be able to close out (i.e trying to set up a protective positon) and the volatility premium on otm options is less. I can see the liquidity is currently at the atm price like I expect it to be. My concern is that if i buy the option I won't be able to close it out if I buy an atm option due to the lack of liquidity.
I have been thinking of getting involved in the US market for some time but haven't had the time to seriously look into it. I'm sure a forum search will highlight the good brokers available. However I don't want to get into trading formally as such and most brokers want you to do a few trades a month; if I have a view on a company or have a position I want to hedge I want the tools available to take advantage of that view.
have read mention of comsec excesive brokerage on other threads . have never been ex on any of my writes as yet so cant speak from experience but have spoken to support desk and been told it is just standard brokerage costs, same as buying or selling any other stock.
would be interested if someone could expand the issue
or is it just that overall comsec brokerage costs are higher than other brokers
(I'm only a beginner as well so apologies to the experienced players for my inevitable mangling of the greeks and other terminology...)
Due to the liquidity issue I generally only trade liquid series where the market maker has obligations so there is a constant spread around the money during the day and if you ask for a spread outside of that range (or put a sensible bid in) then they will provide one.
For further otm positions the volatility will move about a bit and the MM's will definitely take advantage of volatility spikes to fleece you when you buy and volatility collapses to fleece you a second time round when you sell (and given they are likely to be the only ones giving you a price at all you can't blame them).
Splitting the spread and then moving slightly to the MM's side of it tends to work. You tend to pay closer to the edge of the spread for out of the money than near the money but at the end of the day, as sails points out, volatility and delta will affect the option price orders of magnitude more than a bit of slippage. (and theta too of course as you get closer to expiry particularly for otm when volatility is low).
This is also one reason that if looking to take a long (i.e. 'buy to open') position after a spike in volatilty (e.g. take a delta position after a stock breaks out of a trading range) then you are often better off imo going for closer to the money positions because you will pay a lot of IV for the out of the money positions and unless the large move continues at the same strength you can often lose out even though delta goes in your desired direction, because of the collapse in volatility.
If you trade nearer the money you still pay a bit for volatility but proportionally you are getting more delta and the delta takes over more quickly. (though of course this works both ways - so if delta goes against you then your position fades quickly - on the other hand if volatility collapses instead but delta stays neutral or slightly in you favour the position does better than a deeper otm position.)
Alternately if you are taking long put or call positions before a breakout while volatility is still low in anticipation of a breakout then the deeper otm positions would probably work better.
Even if just looking at delta plays rather than doing delta neutral plays whlie trading volatility or the other greeks its still well worth understanding how volatility vs delta works around the money vs away from the money - it will also help in setting up the hedging side of your spread if using skewed spreads to protect a delta position.
Because of the liquidity issue I've also found myself trading the front month most of the time. If I want to take a longer term view I split my capital allocation over the timeframe and roll over each month. But its always a good idea to check the spreads further out before doing so - sometimes volatility spikes or delta reversals will get reflected differently in the front month vs the further out months.
Not sure if its just my imagination, but the MM's in different stocks seem to have different styles (this would also I guess directly relate to the fact different stocks exhibit different characteristics in terms of liquidity in the underlying stock, typical volatility levels etc.) so its worth getting a feel for the stocks you trade in because it might affect your strategies given slippage is an inevitable part of it.
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