On March 11, I wrote about the proposed new SPXpm options. These proposed new electronically traded options will trade on the new C2 Options Exchange. The title of that article was "SPX Options Traders Will Have a New Vehicle . . . Maybe."
It's still a maybe.
On June 3, CBOE Holdings, Inc. announced in a press release that the "Securities and Exchange Commission (SEC) instituted 'proceedings to determine whether to approve or disapprove' the proposed rule change filed by CBOE Holdings to launch SPXpm." The SEC was required by the regulations of the Dodd-Frank Bill to make certain steps by June 6, and this decision to institute proceedings was intended to meet that deadline. The SEC will accept public comments for thirty days. I went to the SEC's site with the intention of providing a link for those who want to address comments regarding these electronically traded options, but this matter was not yet included under the "SEC Seeking Public Comments on" section, so perhaps the comment period has not yet begun. You can find my Mach 11 article in the archives, if you'd like to review information about the proposed offering.
Although some concerns that I and others have should be addressed, many traders long for these electronically traded SPX-related options. Once again this week, I was picking up chatter about how hard it is to get fills on the SPX, particularly on hard down days such as some of the ones we had in early June. I heard one trader remark that he had been trying to close out an SPX calendar and couldn't get a ready fill. Well, I can tell you that I was trying to close out a RUT calendar during one of those days, and I ended up buying a put to hedge my position while I tried to work the order because that order just wasn't filling. The problem with fills during hard down days or any fast-market conditions isn't exclusive to the SPX or OEX. During fast-market periods, traders may find it harder than is typical to get fills on many options on many underlyings, no matter how they're filled. I've said several times that on the Flash Crash Day more than a year ago, I was able to get decent fills on some SPX spreads, and I think that was because of the open outcry system that created a more stable market than some situations I saw or heard about with the RUT and other underlyings.
However, it must be admitted that with the SPX and OEX options, some differences do exist, and I thought, while we're on the subject of the SPX, we might review some of those differences. First, it's important to realize that some bid/ask spreads may be particularly wide, and you may not be sure where the true executable price is. We always hope we'll get fills near the mark or mid price, and sometimes that happens. Sometimes we get better fills than that. Sometimes not.
On June 9, with the SPX at 1289, the JUL11 1290 puts and calls had bid/ask spreads of $1.60 and $1.40, respectively. The deep ITM 1390 puts had a bid/ask spread of $2.20 and the deep ITM 1190 calls, $2.00. I've seen them wider. Far wider. On the 1390 puts, bid size was 103 and ask size, 103. Those aren't bids from retail traders and institutions. That's set on the floor. Will you get a trade filled at mid price between the bid and the ask? Who knows. That depends on market behavior, in my experience. If you're trying to buy a negative delta position in a fast down market, requiring the floor trader to go long deltas, you will almost certainly have to pay that floor trader more to take on that risk. If you're trying to trade a spread, matters can get even more complicated than with a single put, for example. The people on the trading floor may be fielding so many trades during fast market conditions that spreads get tended to later.
Spreads on the far OTM options that iron condor traders typically use can be similarly complicated. Some traders find that when trading the SPX and OEX, they can plumb for the right level by submitting a one-contract order for the price they'd like to pay or the credit they'd like to receive and then inch that order up or down as is appropriate and within their desired ranges, finding the level at which it's filled. When I was with one brokerage, the minimum ticket charge kept me from employing that tactic because I would pay as much in commissions for that one contract as I would for 10 contracts. Experience over the years had taught me where I was likely to get a fill, and I would plumb for a fill with my entire order.
Other traders find that even when they've found an executable price, their orders fill better if broken up into smaller lots of 10 or under orders, because they're handled differently on the floor. Be aware that it's my understanding that if an SPX or OEX order isn't filled rather quickly, it goes into the order book, where it is also handled differently.
Once you receive a fill on an SPX or OEX order, particularly one involving some far OTM options, be prepared to see your unrealized profit/loss figures vacillate greatly even without much movement on the SPX or OEX's part. I've noted this phenomenon previously, but all it takes is a rogue unfilled order sitting out there somewhere to change the bid/ask spread and make your position look wildly profitable or miserably unprofitable from moment to moment. End-of-day mark levels can be wildly off as those on the floor set wide bid and asks at the end of the day. Fridays, prices can vacillate a lot as those on the floor start rolling out some of the expected weekend decay by changing the volatility levels by which options prices are calculated. Some art and experience are required to understand what might be happening when you're accustomed to keeping a watch on your unrealized profit and loss and making decisions about your position.
I like the SPX because it's a big enough index that it's not so easily pushed around, as is the Dow Industrials. I used to trade the OEX quite a bit, too, because it tended not to be as volatile. Market behaviors have changed quite a bit over the years, with even the big indices gapping up and down in the mornings with some regularity, which just didn't happen much in "the old days." What hasn't changed, however, is that trading the SPX and OEX may require traders to accustom themselves to some special quirks, but that doesn't mean that they're not tradeable and don't have value to traders.