Making the spread in options

[CHRISTO9HER]

Hi Guys

Up until now I have mainly traded futures, have done fairly well. Looking to branch out a bit and trade some options, mainly the currency options on Philly exchange.

My questions are these:

1. Does the order book for the options work in a similar way to a futures DOM view?

2. Can I enter limit orders? i.e. can I buy at the bid and sell at the offer like I can in futures markets?

I had always assumed that one could do limit orders for options, I am asking because someone told me you couldn't although I don't think they knew what they were on about

Thanks,

Chris

 

[Martinghoul]

Well, in theory it works the same... In practice, you have to be very careful with limit orders on options.

 

[CHRISTO9HER]

Why's that?

 

[Martinghoul]

Why's that?

'Cause you might get filled .

Basically, as I am sure you realize, options, unlike the underlying, are affected by a variety of factors. So, for example, let's say the mkt for XYZ calls is 5/7 and you're the 5 bid. Suppose XYZ (the underlying) sells off hard. If, as soon as this happens, you don't back off of your 5 bid in a timely fashion, you'll be the sucker who will get filled at the wrong price (assuming all else equal). Similar goes for when there's a sharp move in vols. That's why you need more sophisticated software for electronic mkt-making of options.