20 Things to Do Before You Ask for a Price (Part 2)
Nov 19, 2024
Delve into the intricacies of institutional options trading dynamics. Discover how understanding a client's needs and market conditions can impact pricing strategies. Explore the significance of timing and the nuances of earnings volatility in options trading. A structured checklist guides traders through evaluating order types, market depth, and volume. Learn the challenges posed by different option deltas and the critical role of collaboration in effective risk management.
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Pre-Pricing Checklist
Know your client, the risk environment, trade motivation, and the stock.
Buy yourself time or optionality before asking your trader for a price.
We are back, with installment number 2 of “20 Things to Do Before You Ask for a Price”. It’s a to-do list for the equity derivatives salestrader who chooses to be a relevant and constructive part of the option risk transfer process that a buy-side client and sell-side trader engage in. Small trades – like buying a pack of gum – can be consummated quickly. Large trades – like buying a house – typically take a while. But large trades that are borne in a moment’s notice – that’s a unique thing with unique risks. Things 6 through 10 are about quarterbacking trades to completion in the context of being short information asymmetry. I hope you enjoy and find this useful.
6. Is the order outright or delta neutral? This dictates speed of response needed to the client. There’s more time on delta neutral orders. 7. Check option market depth. Evaluate the screen market using OMON function. How wide are the screen markets? Is the option better bid or offered? 8. Check volume. Use the OMST function to see option volume in the name and that line today. Check open interest in that line to see if the trade is opening or closing. 9. What is the option delta? What is the share delta? What is share delta as % stock volume? Note that low delta options can be challenging to sell from a risk standpoint and that high delta options can be difficult from a stock liquidity standpoint. 10. Check earnings. When does the stock report? Does this option order comprise a report date or other important release of company information? Run the ERN function to look at historical impact of earnings announcements.
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