Who or What is your option order trading with?

What does it take to fill an option order?

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Are you ever annoyed your option order does not fill?  If the answer is yes, read on. The first thing to understand is that the Liquidity Provider (LP) is only obligated to trade on the bid/offer they post through the system.  Second, most public paper, that is you, trades with the posted LP markets on the screen.  There is very little public to public trade.  That means the LP understands the “tone” of paper coming through the system.  They see a lot of it.

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Understand the hard side and the easy side

The tone of that paper comes in 4 flavors, buy options and sell options, long underlying and short underlying.  Any trade can get broken down into a combination of those four factors.  Try it for yourself.  If paper wants to get long the SPX, the tone is buy the market and that becomes the hard side.  Expect to pay more, or sell for less, for options that get long the underlying.  The easy side is a trade that shorts the market direction and that trade should fill better than posted markets.

When volatility is part of the equation

Besides market direction, buying options and selling options is the next area where option order fills can get more difficult.  Trying to get a decent fill on a credit spread, somewhere mid-market, is painful when the volatility in the option is falling off a cliff.  In that case option orders that sell premium are difficult to fill.  In a declining VIX market for instance, like we had last week, getting decent credit spread prices was very difficult most of the time in the SPX.

Price improvement for an option order

Sometimes an option order will fill much better than anticipated.  LP’s will improve a fill especially if it is the immediate direction their systems are leaning.  Think of the time an order hits and calls are sold instantly at very good prices.  It is a good bet the LP is seeing long underlying option order flow and they are happy to buy what they can.  I tried selling an SPX Iron Condor on Wednesday and did not get filled until the micro burst of volatility on Friday afternoon.

What is the easy side this week?

There is a Fed decision and possible rate cut.  I would expect less liquidity, tougher to fill option orders, and a slight bid, demand for volatility, until the announcement.  Mostly I think the options will be easier to buy after the Fed speaks.  There is always that Tweet Factor but that is for later in the week.

Disclosure: SPX options, VIX options

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