A Penny Here, A Penny There
A Penny Here, A Penny There
One of the more difficult problems with which to deal for an options trader has historically been the broad bid-ask spreads quoted for options. Experienced traders have routinely negotiated the bid-ask spreads downward with varying success when trading individual positions, but the non-economic price has been the significant effort and time required to achieve these negotiated results.
CBOE initiated a Pilot Program to reduce bid-ask spreads to as low as1¢. There was a six-month Penny Pilot Program started on January 26, 2007 with one class, Whole Foods Market (WFMI). Two more classes were added on February 2, 2007, and the remaining ten classes for the Pilot were added on February 9, 2007. There are currently 291 in the series (including such big names as Apple, AAPL and more) quoted in these penny increments, which represents 80% of listed options volume. CBOE maintains an Excel file of option series currently included within this “Penny Pilot” program at: http://www.cboe.org/hybrid/pennypilot.aspx
Because option positions are frequently constructed with several individual legs, the impact of the ability to trade with tighter bid-ask spreads can have significant impact on the aggregate slippage of positions. Combined with the falling commission rates resulting from the increasingly intense completion amongst brokers specializing in options, significant trading efficiencies have resulted.
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About Dan Passarelli
Dan Passarelli, is the author of the book Trading Option Greeks and the president of Market Taker Mentoring LLC. Market Taker Mentoring provides personalized one-on-one mentoring for option traders. Dan started his trading career on the floor of the Chicago Board Options Exchange (CBOE) as an equity options market maker. He also traded agricultural options and futures on the floor of the Chicago Board of Trade (CBOT). In 2005, Dan joined CBOE’s Options Institute and began teaching both basic and advanced trading concepts to retail traders, brokers, institutional traders, financial planners and advisors, money managers, employees of the SEC and Federal Reserve bank, and market makers. In addition to his work with the CBOE, he taught options strategies at the Options Industry Council (OIC). Dan has been featured on television and radio and has written numerous articles in the financial press. Dan can be reached at dan@markettaker.com. He can be followed on Twitter.
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