21 lines
1.6 KiB
Plaintext
21 lines
1.6 KiB
Plaintext
O,apter 6: Ratio Call Writing 171
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prices only, however, he should attempt to build some screens into his output to allow
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for the fact that last sale prices might not be indicative of the price at which the
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spread can be executed. One simple method for screening is to look only at relative
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ly liquid options - that is, those that have traded a substantial number of contracts
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during the previous trading day. If an option is experiencing a great deal of trading
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activity, there is a much better chance that the current quote is "tight," meaning that
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the bid and offering prices are quite close to the last sale price.
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In the early days of listed options, it was somewhat common practice to "leg"
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into a spread. That is, the strategist would place separate buy and sell orders for the
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two transactions comprising his spread. As the listed markets have developed, adding
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depth and liquidity, it is generally a poor idea to leg into a spread. If the floor broker
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handling the transaction knows the entire transaction, he has a much better chance
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of "splitting a quote," buying on the bid, or selling on the offering. Splitting a quote
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merely means executing at a price that is between the current bid and asked prices.
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For example, if the bid is 37/s and the offering is 41/s, a transaction at a price of 4
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would be "splitting the quote."
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The public customer must be aware that spread transactions may involve sub
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stantially higher commission costs, because there are twice as many calls involved in
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any one transaction. Some brokers offer slightly lower rates for spread transactions,
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but these are not nearly as low as spreads in commodity trading, for example. |