Is Market Auction or Volume Profile better suited for certain instruments?

[Enigmatics 10]

My current day trading methodology is an amalgam of volume profile, Market Auction, and VWAP principles. My instrument of choice has been AAPL options. A couple of months ago I made the switch from trading weeklies to a little further out and deep-in-the-money. I just couldn't handle the high rate of time decay anymore. Initially it was a good switch, however recently I have come into a situation where the spread has become problematic.

 

I exclusively use market orders when entering/exit. During the high liquidity part of the day's open, the spreads are awful. For example this morning I had bought some calls on a break above VWAP, the market order was literally 1.40 above the bid. Horrible way to start a trade, especially given that it moved against me. In the past I had always found it difficult to time a limit order with the chart of the underling where I want my entries/exits. With AAPL options, the bid/ask can move extremely fast.

 

At any rate, I was curious what everyone's thoughts were on this matter. I know of a few people having great success trading futures. They have a very structured system and have no issues putting in their orders at particular points in the chart that meet their auction criteria. I feel at times that with options, I'm having to juggle elements that take away from it being a similar "mechanical" trading experience.

 

Thoughts?

[DbPhoenix 42]

Having certain requirements for entry, risk management, and trade management does not necessarily make it mechanical. It can mean only that you're taking responsibility for the trade.

 

In any case, I use stop limits for entry. If price reaches my entry point, fine. Otherwise, to hell with it. No juggling required. But then I don't do options.

[Enigmatics 10]

Having certain requirements for entry, risk management, and trade management does not necessarily make it mechanical. It can mean only that you're taking responsibility for the trade.

 

In any case, I use stop limits for entry. If price reaches my entry point, fine. Otherwise, to hell with it. No juggling required. But then I don't do options.

 

Mabye "mechanical" isn't the best way to explain it. However, with options I'm having to deal with the following issues

 

1. Greeks

2. Spread

3. Options Writers/Sellers

4. Underlying stock's chart

5. Underlying stock's MM's

6. Underlying stock's traders

 

Then there's that issue like this morning where I bought the open on a break above VWAP. That trade instantly put me -1.40 in the hole because of the spread. I know where my chart stop will be, but because of that market order it didn't match my risk management.

 

Because of the complexity of options pricing, I don't exactly know what the price of the strike is going to be when the underlying stock's chart hits the level I like ..... which is what makes it difficult to set a limit order.

Edited February 19, 2013 by Enigmatics

[DbPhoenix 42]

So I guess the next question is why bother with options? Trade something that makes it much easier for you to succeed.

[Enigmatics 10]

So I guess the next question is why bother with options? Trade something that makes it much easier for you to succeed.

 

That's what I'm getting at, but I've never traded other instruments so I wanted to get feedback.

[DbPhoenix 42]

Well, I find futures a hell of a lot easier than stocks. For one thing, you don't have to live in fear of where the thing is going to open the next day. And I avoid forex like the plague. Fortunately, today you can test drive just about anything with all the free trials and you can replay just about anything in order to do whatever backtesting you like to do. Thus you can find something that suits you without risking anything.

 

Of course, there are ETFs, if you get a kick out of watching paint dry.

[Enigmatics 10]

Well, I find futures a hell of a lot easier than stocks. For one thing, you don't have to live in fear of where the thing is going to open the next day. And I avoid forex like the plague. Fortunately, today you can test drive just about anything with all the free trials and you can replay just about anything in order to do whatever backtesting you like to do. Thus you can find something that suits you without risking anything.

 

Of course, there are ETFs, if you get a kick out of watching paint dry.

 

I haven't touched an ETF in over 1.5 years and don't plan to break that streak haha.

 

And ya, gapping in stocks makes life a pain in the ass on a lot of occasions.

 

Well let me ask you this. I'm assuming at one point you traded stocks. Did you notice a marked improvement over time in your own trading once you ditched them for futures?

[DbPhoenix 42]

I haven't touched an ETF in over 1.5 years and don't plan to break that streak haha.

 

And ya, gapping in stocks makes life a pain in the ass on a lot of occasions.

 

Well let me ask you this. I'm assuming at one point you traded stocks. Did you notice a marked improvement over time in your own trading once you ditched them for futures?

 

Over time? How 'bout the next day?

 

But seriously, you can replay as many charts as you like and run whatever approach has been working for you and compare the results. You don't have to go wandering off in the dark.

[Enigmatics 10]

Over time? How 'bout the next day?

 

That quickly eh?

 

But seriously, you can replay as many charts as you like and run whatever approach has been working for you and compare the results. You don't have to go wandering off in the dark.

 

You're right. Something I should look into. I know ToS has that feature, but does Tradestation? That's who my money is with.

[DbPhoenix 42]

You're right. Something I should look into. I know ToS has that feature, but does Tradestation? That's who my money is with.

 

Don't know. However, you can search the site using "replay" and might not get an overwhelming number of hits. Start with the more recent posts since these will more likely be current.

[TheDude 10]

My current day trading methodology is an amalgam of volume profile, Market Auction, and VWAP principles. My instrument of choice has been AAPL options. A couple of months ago I made the switch from trading weeklies to a little further out and deep-in-the-money. I just couldn't handle the high rate of time decay anymore. Initially it was a good switch, however recently I have come into a situation where the spread has become problematic.

 

I exclusively use market orders when entering/exit. During the high liquidity part of the day's open, the spreads are awful. For example this morning I had bought some calls on a break above VWAP, the market order was literally 1.40 above the bid. Horrible way to start a trade, especially given that it moved against me. In the past I had always found it difficult to time a limit order with the chart of the underling where I want my entries/exits. With AAPL options, the bid/ask can move extremely fast.

 

At any rate, I was curious what everyone's thoughts were on this matter. I know of a few people having great success trading futures. They have a very structured system and have no issues putting in their orders at particular points in the chart that meet their auction criteria. I feel at times that with options, I'm having to juggle elements that take away from it being a similar "mechanical" trading experience.

 

Thoughts?

 

Trading options at the open (first few minutes) is asking for trouble. Heres why:

 

Volatility will be at it's highest at this time. That means a market making algo is going to have to work overtime to price correctly. Given the algo will be pricing other products, there becomes an issue - especially with bandwidth and messaging policies. Thus a lot of them will play it safe and quote wider, so avoiding the need to requote. Even at todays nano speeds, theres also the danger of legging risk between getting filled on their quote and then executing on the exchange/MTF.

 

Lets say you have 10 price updates a second in AAPL. Lets say there are 4 expiries, each with 200 strikes for calls and puts. Already thats 320,000 quotes for just one stock per second, not including defined strategies for ONE exchange. Lets say there are around 6 venues where AAPL options are traded.....

 

Many firms will honour their obligations, but they wont be competitive at these time.

[Enigmatics 10]

Trading options at the open (first few minutes) is asking for trouble. Heres why:

 

Volatility will be at it's highest at this time. That means a market making algo is going to have to work overtime to price correctly. Given the algo will be pricing other products, there becomes an issue - especially with bandwidth and messaging policies. Thus a lot of them will play it safe and quote wider, so avoiding the need to requote. Even at todays nano speeds, theres also the danger of legging risk between getting filled on their quote and then executing on the exchange/MTF.

 

Lets say you have 10 price updates a second in AAPL. Lets say there are 4 expiries, each with 200 strikes for calls and puts. Already thats 320,000 quotes for just one stock per second, not including defined strategies for ONE exchange. Lets say there are around 6 venues where AAPL options are traded.....

 

Many firms will honour their obligations, but they wont be competitive at these time.

 

I put a ton of emphasis of making sure I catch the early liquidity. What you say makes sense and yet another reason these options are making me re-think using them as my instrument. There have been many times when AAPL's underlying will make a move from the open to my target, but I actually had self-control to not get in because of the spread. Then there have been times spread crippled my profit potential.

Edited February 20, 2013 by Enigmatics