Buying an illiquid option

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Buying an illiquid option

Postby airahcaz » Fri Dec 14, 2012 5:31 pm

Hi folks -

Am trying to buy some illiquid AAPL 2014 options with some non investing "gambling" money, strike of 1050 (pure crap shoot).

http://finance.yahoo.com/q?s=AAPL140118C01050000

The spread is HUGE. 2.12/2.45 However, as a test, I put in an order to buy 10 contracts at 2.49, which was 4 cents above the ask of 2.45 and it did not get filled! The Ask Size was 60. Does this mean my order needs to be a minimum 60 contracts at 2.45?

btw - Fido originally told me that the Volume was only 17, but I told them that is totally irrelevant. Volume can be 0, still there is an Ask, thus someone willing to sell.
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Re: Buying an illiquid option

Postby Calm Man » Fri Dec 14, 2012 7:29 pm

OP, you are correct. There is no reason this didn't fill. But AAPL at 1050? For the 10 contracts, that would be about $2500. Why not go to Vegas and do a few parlays or play craps? Seriously the odds are probably better. But really, there is no reason your bid didn't fill and in the future, I would never bid above the asked...
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Re: Buying an illiquid option

Postby market timer » Fri Dec 14, 2012 10:01 pm

The 60 contracts offered at $2.45 may have been an all-or-nothing order. That would explain why you weren't filled.
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Re: Buying an illiquid option

Postby airahcaz » Fri Dec 14, 2012 10:37 pm

market timer wrote:The 60 contracts offered at $2.45 may have been an all-or-nothing order. That would explain why you weren't filled.


Yes it was, I wouldn't want a paltry 1 contract. So if it weren't an All or None, would 1 contract be filled even though the Ask size was 60?
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Re: Buying an illiquid option

Postby abuss368 » Fri Dec 14, 2012 10:40 pm

Based on your posts above, it appears that you need an overall better understanding of the options markets. An investor can lose a lot of money with options. Be careful and consider a low cost diversified index fund instead.
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Re: Buying an illiquid option

Postby airahcaz » Fri Dec 14, 2012 10:51 pm

abuss368 wrote:Based on your posts above, it appears that you need an overall better understanding of the options markets. An investor can lose a lot of money with options. Be careful and consider a low cost diversified index fund instead.


I'm a sole index fund investor, but also well versed in options and spreads. I was posting the fact that Fido didn't execute this trade, but for the fact of illiquidity and that it was an All or None.
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Re: Buying an illiquid option

Postby Ranger » Fri Dec 14, 2012 11:44 pm

Image

At-least at the end of the day there were 10 contracts offered at 2.56 at PHLX,AMEX and ISE exchanges slightly above your price. There was only one contract offered at 2.45 at Nasdaq.
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Re: Buying an illiquid option

Postby airahcaz » Fri Dec 14, 2012 11:56 pm

Calm Man wrote:OP, you are correct. There is no reason this didn't fill. But AAPL at 1050? For the 10 contracts, that would be about $2500. Why not go to Vegas and do a few parlays or play craps? Seriously the odds are probably better. But really, there is no reason your bid didn't fill and in the future, I would never bid above the asked...


Premiums on any option closer to At The Money are ridiculously high due to volatility. If the stock makes a run back to its previous high in a decent timeframe, this call should be highly profitable. If the stock surpasses its previous high and gets anywhere close to doubling, this could be a 50-bagger.
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Re: Buying an illiquid option

Postby market timer » Sat Dec 15, 2012 11:00 am

airahcaz wrote:
market timer wrote:The 60 contracts offered at $2.45 may have been an all-or-nothing order. That would explain why you weren't filled.


Yes it was, I wouldn't want a paltry 1 contract. So if it weren't an All or None, would 1 contract be filled even though the Ask size was 60?

The person(s) offering 60 contracts may also have entered an all-or-none order (or perhaps a minimum of 10 contracts).
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Re: Buying an illiquid option

Postby airahcaz » Wed Jan 02, 2013 1:16 pm

Calm Man wrote:OP, you are correct. There is no reason this didn't fill. But AAPL at 1050? For the 10 contracts, that would be about $2500. Why not go to Vegas and do a few parlays or play craps? Seriously the odds are probably better. But really, there is no reason your bid didn't fill and in the future, I would never bid above the asked...


Yes, AAPL at 600 next month, and 1000 in a year, as a gamble, can sell on any signifcant rally beyond 700+ if in the short term

looking at a 10-20+ bagger
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Re: Buying an illiquid option

Postby hollowcave2 » Wed Jan 02, 2013 1:27 pm

AAPL at a strike price of 1050? That means that AAPL would need to double in price this year for you to have any chance at all.

Personally, I think Vegas is a better bet.

BTW, anything with AAPL is not illiquid. APPL has a very active market. Illiquid means you can't trade it easily. Anything with AAPL trades easily. You need to place limit orders, of course, but I wouldn't worry about liquidity. I'd worry about the sensibility of buying this option. If you're bullish on AAPL, get a reasonable strike price. Of course, we can argue about what "reasonable" means.

Unless you plan to trade this option on volatility, I predict there is a 99% chance that you will lose everything you put in. The odds in Vegas are much better.
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Re: Buying an illiquid option

Postby airahcaz » Wed Jan 02, 2013 2:50 pm

hollowcave2 wrote:AAPL at a strike price of 1050? That means that AAPL would need to double in price this year for you to have any chance at all.

Personally, I think Vegas is a better bet.

BTW, anything with AAPL is not illiquid. APPL has a very active market. Illiquid means you can't trade it easily. Anything with AAPL trades easily. You need to place limit orders, of course, but I wouldn't worry about liquidity. I'd worry about the sensibility of buying this option. If you're bullish on AAPL, get a reasonable strike price. Of course, we can argue about what "reasonable" means.

Unless you plan to trade this option on volatility, I predict there is a 99% chance that you will lose everything you put in. The odds in Vegas are much better.



Thus a gamble. But curious, how was the 99% chance calculated?
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Re: Buying an illiquid option

Postby dailybagel » Thu Jan 03, 2013 12:01 am

airahcaz wrote:Thus a gamble. But curious, how was the 99% chance calculated?


Ca I pose a related question? The probability of payoff that hollowcave was referring to is surely related to whether the option is a "good buy."

At what price do you think this option is a really good deal? At what price is it a bad deal? And what price fair?

Understanding this -- qualitatively and preferably quantitativelu -- should be a prerequisite for options investing.
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Re: Buying an illiquid option

Postby hollowcave2 » Fri Jan 04, 2013 9:31 pm

Thus a gamble. But curious, how was the 99% chance calculated?


The same way you calculate a chance of winning on buying AAPL at 1050. Pure gamble.

Seriously, I've been following AAPL and a strike of 1050 seems pretty high for a one year time frame. My opinion is that the stock will test the 705 high this year, and then there will be backfilling and volatility that takes time. I'm bullish on AAPL, but 1050 is a dream, IMHO.

Buying an option that far out of the money would need to have some catalyst to make the stock move, such as another company buying AAPL (unlikely) or a major product development, or a political development of some kind. This type of speculation seems better for a small company or a company on the turnaround, neither of which applies to AAPL.

But very seriously, I'm not saying never to gamble, but find some stock that has a better chance of a buyout or doubling in one year's time. I just don't see AAPL doing this by 2014. I'm trying to save you money here. Now, maybe you're luckier than I am. Evaluate all of these comments and then you just have to go with your gut.

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Re: Buying an illiquid option

Postby hollowcave2 » Fri Jan 04, 2013 9:38 pm

At what price do you think this option is a really good deal?


IMHO, I don't think this particular option is a good buy at any price. The problem for me is the strike price. It's not realistic for a one year time frame.
Even a sharp move up on the stock will not have enough effect on this option because it's so far out of the money and even at one year to expiration, you're still fighting time decay too much.

For me, the strike price needs to be realistic. I know a lower strike will mean more money to buy it, but then you have a better chance of making money. Just because an option is cheap doesn't make it a good deal.
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Re: Buying an illiquid option

Postby Grt2bOutdoors » Fri Jan 04, 2013 9:43 pm

abuss368 wrote:Based on your posts above, it appears that you need an overall better understanding of the options markets. An investor can lose a lot of money with options. Be careful and consider a low cost diversified index fund instead.


FYI - this is the same poster who said a few days ago he hit the 7 figure mark playing options in his IRA.
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Re: Buying an illiquid option

Postby airahcaz » Fri Jan 04, 2013 9:48 pm

The word gamble was included in my original post on purpose, not the word invest.

If AAPL moves to a new high in short order, VIX would also increase, and this option will be worth more - any little movement in the low priced option equals multiple basis points.

For instance, if the stock rallies to 600-700+ where it was not too long ago, there is nothing stopping one from taking a pretty decent profit.

If it goes to 1000 prior to expiration, decently profitable given the high premium AAPL options are commanding.

Lastly, it is a very small portion of my portfolio, and would be upset but wouldn't derail my investment strategy, which is strictly broad market indexing.

Let's see what happens after earnings.
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Re: Buying an illiquid option

Postby airahcaz » Fri Jan 04, 2013 9:50 pm

Grt2bOutdoors wrote:
abuss368 wrote:Based on your posts above, it appears that you need an overall better understanding of the options markets. An investor can lose a lot of money with options. Be careful and consider a low cost diversified index fund instead.


FYI - this is the same poster who said a few days ago he hit the 7 figure mark playing options in his IRA.


FYI - reread that thread - it was all theoretical.
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Re: Buying an illiquid option

Postby Grt2bOutdoors » Fri Jan 04, 2013 9:57 pm

airahcaz wrote:
Grt2bOutdoors wrote:
abuss368 wrote:Based on your posts above, it appears that you need an overall better understanding of the options markets. An investor can lose a lot of money with options. Be careful and consider a low cost diversified index fund instead.


FYI - this is the same poster who said a few days ago he hit the 7 figure mark playing options in his IRA.


FYI - reread that thread - it was all theoretical.


Too bad, would have been sweet to have hit it big, even if you were using options to get there.
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Re: Buying an illiquid option

Postby hollowcave2 » Fri Jan 04, 2013 11:20 pm

For instance, if the stock rallies to 600-700+ where it was not too long ago, there is nothing stopping one from taking a pretty decent profit.


This is a strategy that has the best chance of winning for you. You need to look at option terminology for the greeks, or statistics on how an option price behaves relative to the underlying security. In your case, you need to look at delta. For an option that is far out of the money, the delta is very small and you need a large increase in the stock price plus multiple contracts to make it worthwhile.

You're not alone in trading this option. It traded today, in fact, so others have the same idea. As of today, the delta is 0.03, meaning that a $1 change in AAPL leads to a 0.03 cent change in the option. But this will vary with volatility and time decay.

Let us know if you win. Good luck.
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Re: Buying an illiquid option

Postby airahcaz » Fri Jan 04, 2013 11:44 pm

hollowcave2 wrote:
For instance, if the stock rallies to 600-700+ where it was not too long ago, there is nothing stopping one from taking a pretty decent profit.


This is a strategy that has the best chance of winning for you. You need to look at option terminology for the greeks, or statistics on how an option price behaves relative to the underlying security. In your case, you need to look at delta. For an option that is far out of the money, the delta is very small and you need a large increase in the stock price plus multiple contracts to make it worthwhile.

You're not alone in trading this option. It traded today, in fact, so others have the same idea. As of today, the delta is 0.03, meaning that a $1 change in AAPL leads to a 0.03 cent change in the option. But this will vary with volatility and time decay.

Let us know if you win. Good luck.


Well aware of the greeks - delta, vega, theta - delta will increase significantly as the underlying increases, As will vega, but theta erosion is against us. Given what you've written, a stock price of 700 is 150 or so above recent prices, thus 150x.03 is is 4.5. On a $3 option, that is a 150% return. Of course it would have to rise to 700 in quick fashion for that delta to remain before theta erodes.

Highest price for this option was $22 in the past when the stock was at all time highs. Let's hope it gets back there, hopefully after earnings.

Gambling the greeks.
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Re: Buying an illiquid option

Postby dailybagel » Sat Jan 05, 2013 9:14 am

airahcaz wrote:
Well aware of the greeks - delta, vega, theta - delta will increase significantly as the underlying increases, As will vega, but theta erosion is against us.


Haha, the answer to my above question, whether you can figure the fair value of an option, seems to be YES.

Be careful and good luck.
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Re: Buying an illiquid option

Postby airahcaz » Sat Jan 05, 2013 9:56 am

dailybagel wrote:
airahcaz wrote:
Well aware of the greeks - delta, vega, theta - delta will increase significantly as the underlying increases, As will vega, but theta erosion is against us.


Haha, the answer to my above question, whether you can figure the fair value of an option, seems to be YES.

Be careful and good luck.


Plenty of free BlackScholes options calculators as well
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Re: Buying an illiquid option

Postby airahcaz » Fri Jan 25, 2013 5:59 pm

Had to bail. Sold the 1000 strike and bought the 700

Bloody aapl, let's see if it recovers
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Re: Buying an illiquid option

Postby airahcaz » Sun Oct 27, 2013 9:47 pm

airahcaz wrote:Had to bail. Sold the 1000 strike and bought the 700

Bloody aapl, let's see if it recovers


Earnings tomorrow. The 700 strike is still a gamble. We'll see.
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