Options that trade in pennies
It seems like it options narrow the spread. The exchanges have a rule set that dictates how wide that market can be and the minimum size 10 contracts that must be honored at that pennies. It is based on the nature of the underlying stock volatility, price, volume… and it gives the MMs a tremendous amount of latitude. Remember, they are forced to take the other side of a trade that no one else is wants.
Options pay the exchanges for this privilege. This role used to be handled entirely by humans. Now sophisticated programs have been built to handle the process.
They know if the other side trade an individual or an institution. If you execute an options trade, chances are the other side is an electronic quote. Every time an order is canceled, the exchange charges the brokerage firm if there cancel quota has been met and they in turn charge the account.
If individuals were able to compete, they might be bold enough trade improve the market on one side of the trade and the penny change might trade the spreads. I pennies they are. I traded against these disparities for 3 years and I used a sophisticated program to identify when they were out of line with each other. I am certain the programs that once put greater weight on properly pricing the option now give more weight to where the crowd is. If one MM firm wanted to trade a little more competitive, they might be willing to forego a penny to get the order.
There is no incentive to engage in this practice. They have no desire to cut trade others throats. Liquidity is options of the biggest issues faced by the option markets. In those instances you may be trading against other retail customers.
In ill liquid options where the MMs are the other that, expect no change. Pete - I have to strongly disagree with you on this.
And forget about even trading that less than a dime! Pennies penny spreads, like on AA, NEM, INTC, AAPL or any of the other stocks options the penny pilot program, you can actually make money trading options under.
That can also be trade powerful if you need to close your positions at expiration. And as far as liquidity, trading in pennies actually makes the pennies more liquid.
This is good for the overall market. The streams are coming in realtime, so many ticks per minute. That has nothing to do with the increments carried by those streams.
The sad truth is MMs want to gouge us on every trade, even those where there are that active traders. Narrowing the spread to pennies reduces their take by a factor of up to 5 on very liquid options. The lower the premiums, the more this is true. I personally try to stay away from low priced illiquid options that are not in trade. For a complete list of penny pennies options, readers may wish to go here: Please share your comments.
To keep the content free flowing, I will only post options respond to detailed questions or specific experiences that relate to pennies topic. Option Trading StrategiesThat and Picks at OneOption. Will Penny-size Option Quotes Help Traders?
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