Stephen Cooper

Volume

nicholasbellono said: "How many option contracts can you buy without changing the market? Example: I just did very well on DNA JAN 85.00 Calls. The total voume as of this post is 9,747 How many contracts could I purchase on that call? And how many without changing the market of that call? Thanks guys."

drdan said: "Interesting question Nick and I do not really know the answer except to say that options are not traded like stocks and volume usually does not affect the price very much. Price of an option is based on time value and intrinsic value. Time value is based on the amount of time and the volatility of the stock. Volume plays only a small part and that is if you get filled or not. When trading straight calls and puts I like to look for options that have at least 100 contracts bought/sold. But hypothetically if you had 9,000 open contracts and you put in to buy another 9,000 at market price the market maker would be obligated to sell them to you, but you might find that your price is going to be pretty steep. In general I beleive volume only dictates liquidity not price when dealing with options. ANy thoughts Holzie?"

Rbreb13 said: "To buy 9000, wouldn't somebody else have to write 9000? Options are a zero sum game aren't they? I know the MM might have some in their inventory but having the whole 9000 at one time would be a tough one on an option that only has 9000 open interest. I could be totally wrong here, still learning options."

drdan said: "No you are correct; however the MM if I am correct has to sell you contracts when you place a market order. It is what keeps the markets moving. You NEED contracts or shares to keep the market moving. So I beleive that if you place a market order they have to fill it. You probably would not get a complete fill. I really don't know? It has never really come up. I have accidently placed an order for 50 contracts and was filled immediately when I only wanted 5. It took me half the day to sell the 45 contracts back and surprisingly I broke even when selling them back. The price was not affected by my purchasing 50 or selling the 45 at least I did not notice a change. My hypothetical 9000 contracts is not a reality. I know of no one that is going to be able to command 900,000 shares!:dazed052: Just playing to the extremes here thinking out of the box. What would happen to the price of an option if someone tried to do that. Does inventory count in this situation because truly you are just buying and selling paper not physical stock shares? Hmmm..."

Rickster said: "It depends on who is selling. If pros are selling (making the market), price is affected as follows. The pros make money off the spread. That is, they are not counter speculating against you. They sell you the options at a price determined by calculation, and immediately buy or sell stock to hedge their positions. But they don't hedge one for one, that is one hundred shares for each contract. They only buy/sell a fraction of the 100, in accordance with the option delta. If you were to buy a large quantity, you could influence the price of the underlying stock by forcing the delta hedgers to buy or sell stock. Then, as the stock price changes, the option price changes accordingly. I know this may sound like a stretch, but I have actually seen it intentionally done to trigger turning points in the market. I amateurs are selling, the price of the options will be influenced by supply and demand. If you are trying to buy more than is readily available, you will drive up the price."

holzie said: "[QUOTE=Rickster]It depends on who is selling. If pros are selling (making the market), price is affected as follows. The pros make money off the spread. That is, they are not counter speculating against you. They sell you the options at a price determined by calculation, and immediately buy or sell stock to hedge their positions. But they don't hedge one for one, that is one hundred shares for each contract. They only buy/sell a fraction of the 100, in accordance with the option delta. If you were to buy a large quantity, you could influence the price of the underlying stock by forcing the delta hedgers to buy or sell stock. Then, as the stock price changes, the option price changes accordingly. I know this may sound like a stretch, but I have actually seen it intentionally done to trigger turning points in the market. I amateurs are selling, the price of the options will be influenced by supply and demand. If you are trying to buy more than is readily available, you will drive up the price.[/QUOTE] Yes, this is exactly right. Remember, the MMs are the real pro's and while they are there to keep the market moving, they trade on their own account, meaning what's ultimately best for them while staying in line with the basic rules, like the NBBO (National Best Bid or Offer).meaning they still have to give you the best possible price on a fill they can at the moment. If they don't they get into some major trouble PLUS, if you complained to your broker and it was shown that you got an awful fill for what was available at the time, the MM will have to get you the difference. But anyways, I obviously have never been able to move shit with my account but this is the basic workings of IV of options. If you have open interest of 9000 at a particular strike and the option price is 1.00, you will not get filled if you enter the market with a buy/sell at LIMIT 1.00. You might be lucky to walk away with 50 contracts on that limit order and the MM is NOT obligated to fill you because he can't. If you drop a market order (NOT LIMIT) in for 9000 contracts (BTO), you WILL get filled. Like Rickster said, the MM is going to create a hedged position for himself to fill you at "market" and he will make almost certainly money by doing so, while selling you your last 1000 contracts at 6.00 :) Not to mention, you might create a pretty decent buzz and some smaller speculators will want to get in with their 10-20 contracts. Just remember supply/demand and you will understand the concept. But DrDan was absolutely right. Options consist of intrinsic and extrinsic (time) value. The intrinsic value (if there is any) is the same for all options, but the time value contains volatility factored in. If you need a proof, compare the price of 1 strike OTM for BAC and COP. Conoco is much more volatile stock, hence the options are volatile and have a decent volume (supply/demand) because that is attractive to both speculators and hedgers. Another great example of "expensive" options is AAPL. This was an excellent question BTW. I was always wondering myself. Suppose this hypothetical scenario. Let's say I am a one wealthy mofo with a $1 mil options account and I want to do a 95% probability SPX condor with it in 1 specific strike. How do you get a decent fill? And more importantly, as DrDan said himself, how the hell do you get out if you have to? The MM sees your position and he will try to get every penny out of you when you are in a squeeze trying to get out. Bottom line is that if it was that easy, you would almost certainly be making 5-600 grand a year with that 1 mil account but if it was that easy, everybody would be doing it. So there is your answer really. You can't just dump in a huge order at once doubling the open interest without some serious effect on the option price. On the other hand with the hypothetical 1 mil account, you could still do it but you would have to start like 7-8 weeks out, and it might take you a week to get it all slowly filled at acceptable prices and you would have to be exiting just as patiently. It would probably be easier if you spread that account between SPX, OEX, and RUT........I know too long of a post but the question was really great. Holzie."

holzie said: "[QUOTE=drdan] When trading straight calls and puts I like to look for options that have at least 100 contracts bought/sold. [/QUOTE] That is really the golden GENERAL rule. Dan Sheridan from the CBOE says it doesn't matter though, open interest is not the one that will kill you -- it's the damn spread .40 apart that will get ya :) :roll: But the MM will love you though!"

drdan said: "[QUOTE=holzie]That is really the golden GENERAL rule. Dan Sheridan from the CBOE says it doesn't matter though, open interest is not the one that will kill you -- it's the damn spread .40 apart that will get ya :) :roll: But the MM will love you though![/QUOTE] Ain't that the truth! Also thanks Rickster I knew someone with closer "professional" experience would know the answer. My trading account is only $10K anything over that goes into my investment account. So at the most on my spreads I am buying or selling 5 to 10 contracts. Doesn't move the price that much. I ended up with that 50 the one time on an auto-fill from my computer in the input and quick fingers on the enter button. I had previously purchased 50 contracts on the QQQQ's and it filled in 50 for me on the input screen when doing a spread. It taught me to definitely examine "heres the trade you are asking for, do you really want to do this" screen. 50 contracts on the QQQQ's is not going to move the price much either. I can definitely see how hedging is what is going to help the MM fill your order and still make them money."

Rbreb13 said: "Good stuff guys, Thanks!"

nicholasbellono said: "Thanks for your replys. I'm not planning on 9000 contracts, however I am curious as to what will happen. My orders continue to get larger and I'm just wondering how it works with high volume. My concern is turning around and selling the options and that there won't be enough demand as Dr.dan stated. Thanks again and good luck with your trades."

Delta said: "I wouldn't worry about moving the market unless you are planning to trade some serious size. In my market-making days, we would hardly move the market for anything short of a 50 lot, and that would only result in a move of a teenie (1/16) in the bid/ask spread. Obviously, that will change depending on the volume of the issue involved. I can't tell from your example if 9000 is the ADV of the entire product or the volume on a particular strike. If it's the latter, then you're not going to move the market until you start trading 100 lots or greater. From the tone of your message, it doesn't sound like you are quite in that league yet. In most of today's liquid products, (goog, msft, QQQ, etc) you have to get into 500 or 1000 lots before you can really make a dent in the market."

Rickster said: "[QUOTE=Delta]... In my market-making days, ...[/QUOTE] Uh oh! Watch out what you say about those evil market makers. (I defend you guys, by the way). Welcome Delta. :)"