Monday, November 2, 2009

For those who actively trade options on an intra day bases or swing you will be happy to know the cost of buying an option has in theory been reduced today(in 75 stocks). The NYSE arca penny pilot program has been running for a little over year now with a slower than expect roll out. The tightening of option spreads from a nickel to a penny is the primary purpose of the program. So how does this program make trading options cheaper? Well, in theory a nickel wide option you have to pay the spread no matter what, usually .05-.15 on average. Now the spread "in theory" will be a penny wide, though most still price in a spread of .07 or so. Thus when entering a position you can essentially put in an price you like all the way up to a penny away from the ask, or vise versa. What makes this program interesting in my opinion is not the reduced cost of entry, it's the fact options now price and trade in a more fluid and predictable manner than in nickels. There are now greater opportunities to exploit inefficiencies in pricing because you can see where everyone sits in the book and at what price. This makes for great scalping.

Case study trading examples of the programs affects on trading:
FAS & FAS are the best examples of the program's ability to increase liquidity and price discovery. Today i watched and scalped the price action in FAZ calls and FAS puts. What i noticed were very sharp and liquid rises in the prices of 50 delta or higher options. Specifically the 23 call in FAZ moved up in price much quicker with the ability to be hit on the bid and taken on the offer. Granted we had a pretty volatile day so the volatility of a 3x ETF's options are gonna be 3x as crazy. Take a look tomorrow and see for yourself.



OFFICAL NYSE releases on the program:

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