April 25 proved a frustrating, difficult, and, in some cases, expensive day for some options traders. The CBOE experienced difficulties, delaying the open for their proprietary products. Those include the SPX, VIX, OEX, and XEO. That "delayed opening" was delayed several more times as the morning wore on. To make matters worse, the CBOE/Euronext agreement with Russell products to bring the RUT options to CBOE exclusively appeared to have been implemented that day. Traders accustomed to routing their RUT orders to ISE found that they could no longer route their RUT orders there.

Traders with good-to-cancel orders often could not cancel their orders without contacting their trading desks. They had no data feed on CBOE's proprietary products. Those who needed to adjust--or worried that they probably needed to adjust--their SPX, OEX, XEO and VIX options trades could not do so. In some cases, losses accumulated.

What could options traders have done? RUT trades did appear to be filling, if somewhat slowly, when "Best" or "SMART" routing was chosen, depending on the brokerage. Another tactic might have been to adjust using SPY options for the SPX and OEX and IWM for the RUT.

Example of an SPX Butterfly:

This butterfly has a delta of -6.55 at inception, with current profit/loss line slanting lower as price moved to the upside. This example is used to show how beta weighting can be accomplished, not to demonstrate a specific trade that might have been needed the morning of April 25. Few would have been opening new butterflies that morning.

If a trader wanted to hedge by buying enough calls to bring that negative delta up to somewhere near -3 but could not trade SPX options, how could that be done? If your brokerage provides the ability to beta weight your options combinations, as TOS does, the process is relatively easy.

Beta Weighting an SPX Position:

Whiting out the chart for the benefit of those subscribers who don't like colored charts renders the chart less legible, but in the top left-hand corner, it's possible to see that the "beta symbol" is the SPX. That's important, because the Greek values will be much different if you're using the SPY as the beta symbol. You're beta weighting a SPX position using a SPY option, so choose the SPX as the beta symbol. Then it's easy to play around with the strikes and find a SPY option(s) that will do what you want to do. In this case, I needed only one SPY option to accomplish the goal, but in some cases, you might need up to about 10 SPY options for each SPX option that you would normally have used. Commissions will obviously mount quickly, but when losses are mounting without a needed adjustment, this might be a good substitute tactic.

What if your brokerage platform doesn't allow for beta weighting? You know that the SPY is approximately 1/10 the value of the SPX. The SPY Jun13 166 call has a delta of .33 or 33 once the 100 multiplier is applied. Divide that by 10, and the SPY option contributes about 3.3 positive deltas to the SPX options trade. That results in a total position delta of -6.55 original delta + 3.30 SPY contribution = -3.25 beta-weighted deltas. That's close to the TOS-computed -3.29. It's also possible to hedge OEX and XEO options using SPY options, although manual computations will prove a little more difficult for the OEX.

According to Think-or-Swim's trading desk, many options traders were taking a different route to hedge their SPX options trades. They were trading options on e-mini futures. Volume in e-mini options, often quite decent, exploded that day. Since I haven't traded options on the e-mini's, I can't give you any authoritative advice on that tactic, but I can tell you that's a choice many traders made on April 25. It's a tactic you might discuss with your broker, if another April 25-type event occurs and you need to adjust. Consultation with the trade desk should absolutely be undertaken before trading options on futures. I don't trade them and so am not knowledgeable about the pros and cons.

Be careful about considering doing the same with the /TF futures for RUT trades, however. The following chart shows some TOS-supplied statistics on options on /TF futures for May 8, 2013, the day this article was first roughed out.

Statistics for /TF Futures on May 8:

Total options volume on the /TF contract for that day was only 151 contracts. That's too low for good liquidity.

Along with these complications on April 25, solvable through these other work-arounds, was the new wrinkle in trading the RUT options. ISE's electronic trading platform is no longer available as a choice when routing the RUT trades. How will this impact trading on the RUT? Will we see the wide spreads there that we sometimes see on the SPX? Will we have trouble with fills? I have experienced some slow fills since April 25, but then volume has been exceeding low across all exchanges, and I would expect fills to be slower in those conditions. I have several times received fills at better than the limit price I put in on the order, and I'm not complaining about that. Those better prices were confirmed by a fellow trader.

What will be the other impacts of this change? We just don't know yet.

April 25 presented many challenges for traders, but a little "what if" questioning before such events occur help us to determine how we would react in case of a repeat.