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Old 04-03-2014, 01:20 PM   #21
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I guess the problem here is your frequency of trading. I am writing calls that expire in Jan 2016 that are 20% out of the money. If I can get $2 for the call on a $30 dividend paying stock, then I don't care a great deal if I missed out on $2.01. Let the HFT guys fight over the penny every 2 years if it makes them feel better.
How to you handle your downside risk? You'll have to hold onto the stock until 2016. I guess you could pull the plug and buy the calls back and sell your shares but since 2016 is far off will sharp drops of say a buck or so cause the long term call to drop significantly.
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Old 04-04-2014, 12:25 AM   #22
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So I conducted an experiment today. About 5 minutes before the market closed.
I checked on the NM June 10 calls the same one Brewer sold earlier.

The bid price was $.60 there were more than 1500 bids at the price, the CBOE exchange alone had more the 400 contracts

The ask price was $.70 there were more the 2500 contracts at the price, CBOE had 600+ contracts available.

I entered an order to sell 5 contracts at .65. Instantly there were 2500 contracts available at $.65. I immediately cancel the order all the ask remained at $.65.

Now mind you this is for contract which did zero volume today. The open interest on the contract was 6800 and it is by far the most active NM option with typical volume about 20 or 30 contracts,and with 3 spikes of 1K+ volume in the last month. The average volume of the stock is 750K/day and there are 100 million shares outstanding.

Imagine somebody trying to buy 1000 or even 100 contracts could reasonably conclude that he could buy the options at $.65 today and based on history someday he could have. However, today there was no actual liquidity, just HFT creating the illusion of liquidity. Somebody entering a order to buy 1000 contracts at $.65 would have been lucky to get 10 at the price. If the person was foolish enough to make a market order, who knows what price he'd pay. $1.50, $2,3?.

Of course this behavior isn't just extend to options. I've ended up buying 1 share for $3 , when I was trying to buy 2000 shares of microcap that I've followed for years. I was pissed cause the $9 commissions were more than stock. Last May American Electric Power (a dull utility I own) fell from $50 to $22 in less than a minute. The NYSE erased the trade in the high low calculations, but some poor guy (who probably had a stop loss entered) sold his $50 stock to some HFF firm for $22. The NYSE didn't reverse the trade.
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Old 04-04-2014, 06:19 AM   #23
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Originally Posted by clifp View Post
So I conducted an experiment today. About 5 minutes before the market closed.
I checked on the NM June 10 calls the same one Brewer sold earlier.

The bid price was $.60 there were more than 1500 bids at the price, the CBOE exchange alone had more the 400 contracts

The ask price was $.70 there were more the 2500 contracts at the price, CBOE had 600+ contracts available.

I entered an order to sell 5 contracts at .65. Instantly there were 2500 contracts available at $.65. I immediately cancel the order all the ask remained at $.65.
I assume you monitored the stock price while this was happening to eliminate any delta-effect. I estimate the delta of the option was about 0.4, so a 0.10 move in the stock price should move the option price by 0.04.

You probably wouldn't want to do this, but it would be interesting to see, if you cancelled your sell offer and immediately put in a bid to buy 5 contracts at 0.65 if you would get immediately filled.
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Old 04-04-2014, 06:57 AM   #24
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I assume you monitored the stock price while this was happening to eliminate any delta-effect. I estimate the delta of the option was about 0.4, so a 0.10 move in the stock price should move the option price by 0.04.

You probably wouldn't want to do this, but it would be interesting to see, if you cancelled your sell offer and immediately put in a bid to buy 5 contracts at 0.65 if you would get immediately filled.
The stock moved a penny from 9.20 to 9.19, since the order was valid for no more than a minute. I imagine 5 would filled because HTF firms have a 1 contract/100 share order at the fastest exchange (BATS) so probably there are 5-10 single contract order (1 per HTF firm). They have to wait for the order to hit the first exchange before they can front run. I know I have a had a lot of 10 contract order filled with 1,1,1,1,5,1 made in rapid session. It was more tempting to put in an order for 100 and see how many contracts I got.

BTW, these were exactly the type of experiments that Brad Katsuyama crew at Royal Bank of Canada did. But then RBC was allowing them to losing $10,000 a day, and it would be own money.
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Old 04-04-2014, 07:10 AM   #25
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How to you handle your downside risk? You'll have to hold onto the stock until 2016. I guess you could pull the plug and buy the calls back and sell your shares but since 2016 is far off will sharp drops of say a buck or so cause the long term call to drop significantly.
What downside risk? You mean the same risk that every other buy and hold investor that does not sell calls faces?

The biggest downside risk is that the market shoots up and I make 30% but have to pay short term capital gains.

I was selling calls on an index btw.
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Old 04-04-2014, 07:19 AM   #26
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I think I have managed to move the bid/ask spread on some thinly traded options in the past.

I wanted to sell some $1 calls on a stock that I happen to have in two different broker accounts. The bid was $0.80 and the ask was $1.20 before my order at one broker. I put in an order for $1 and the ask dropped to $1 but nothing filled. I removed the order after 10 minutes and the ask went back to $1.20. I then put a bid order for $0.90 in the other broker account (I would have been ok buying the calls for $0.90 as they had full intrinsic value at that price and I would have just sold my shares in that account). Now the bid went to 0.90 and the ask stayed at $1.20 but the bid order didn't fill. I then jumped to the other account and again offered to sell calls for $1 and had them immediately fill.

It is possible some buyer came along and all of my manipulations didn't actually do anything, but it was interesting. I like to think I screwed over some computer though.
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Old 04-04-2014, 07:29 AM   #27
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It was more tempting to put in an order for 100 and see how many contracts I got.
I agree but I didn't want to suggest that.

Do you think a small investor could use this to game the HFT? That is, say you really wanted to sell 5 contracts at 0.65. You put in a bid at 0.65. If the bid (and size) moved up to match yours, you cancel your buy order and immediately put in a sell order with a limit of 0.65. Of course, you would be taking the risk that your bid would be hit.
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Old 04-04-2014, 08:57 AM   #28
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I agree but I didn't want to suggest that.

Do you think a small investor could use this to game the HFT? That is, say you really wanted to sell 5 contracts at 0.65. You put in a bid at 0.65. If the bid (and size) moved up to match yours, you cancel your buy order and immediately put in a sell order with a limit of 0.65. Of course, you would be taking the risk that your bid would be hit.

Read what you wrote again. You as a retailer will never be faster than the HFTs. Its possible that they will get tossed out of the market by regulation, but I doubt it. Don't bother with these games.
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Old 04-04-2014, 10:27 AM   #29
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Read what you wrote again. You as a retailer will never be faster than the HFTs. Its possible that they will get tossed out of the market by regulation, but I doubt it. Don't bother with these games.
Actually, it wouldn't be the HFT that I would be worried about. The risk to me would be that someone else (possibly another retail investor who wanted to sell) would hit my initlal bid, and I would end up long the contracts I wanted to be short. In fact, I could even get screwed by a fool who happened to put in a market sell order. This is why I wouldn't try this.

Nevertheless, I find it interesting that in Clifp's experiment the offer/size remained at 0.65/2500 after he cancelled his sell order, rather than immediately going back to 0.70, and it appears that he had time to turn around and go the other way had he wanted to.
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Old 04-04-2014, 12:54 PM   #30
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It seems like it probably would work for small contract say 5 or possibly 10.
But, I think you'd have to do a lot of experiment to come up with good answer.

On the other hand if the spread is .60/.70 what I'd really is to understand the true volume, and generally try to get the full $.70
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Old 04-04-2014, 02:35 PM   #31
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IMHO the stock market has alway been corrupt and will remain so as long as there is a market. A few years ago on this forum I mentioned the book By Richard Ney, The Wall street Gang. Written in early 1970ies. A good expose of the shenaningans of that era.

There will be new schemes, of collusion and electronic nature. Just too much money to be made to pass up slick maneuvering.

Remeber the day trading craze, ummm, I think they all got skinned.
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Old 04-15-2014, 08:51 AM   #32
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One explanation for the drop in the market last week...

The Real Reason The Market Fell [Dow Jones Industrial Average 2 Minute] | ETF DAILY NEWS

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So what’s the REAL reason the market fell?

Well, I think you can rule out fundamental developments. The jobs data wasn’t dismal. There weren’t any major corporate earnings warnings. Russia didn’t invade a new province in the Ukraine, nor did some new emerging market blow up overseas.

Instead, I think it goes back to a simple explanation — fund dumping, particularly hedge funds. One Goldman Sachs report quoted at the financial blog Zero Hedge said that its hedge fund-tracking basket just suffered its worst performance since May 2001.
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