Saturday, September 01, 2012

Easier Options Orders

Online broker OptionsXpress automates the process for traders looking for the best price on an options spread.

OptionsXpress has added a nifty new order type to its All-In-One trade ticket that should be useful for traders. It’s called the Walk Limit, and it’s intended to help the trader work an option spread and get a better price. Joseph Vietri, optionsXpress’ CEO, explains that the aim is to facilitate multi-leg option spread orders and possibly save online brokerage customers some money.

The All-In-One trade ticket is part of optionsXpress’ (optionsxpress.com) Web-based platform and, logically, is found under the “Trade” tab. We’ve been fans of this ticket approach since its launch last year. It makes the appropriate trade-order ticket available for whatever instrument you’ve chosen. The Walk Limit adds a new dimension. Normally when you enter an option-spread order, you choose a limit price between the bid and the ask, and watch to see if it executes at that price. If not, you manually adjust the limit price.

The Walk Limit order type “walks” from the midpoint of a spread price to the ask price, bumping your limit-order price automatically every two seconds until the order is filled. It’s available for six types of two-legged option spreads: call spreads, put spreads, straddles, strangles, calendar spreads, and diagonals.

The new order will be very helpful for those who create spreads that have a wide gap between bid and ask prices. The Walk Limit defaults its starting price at the midpoint between bid and asked, and then gradually steps toward the National Best Bid or Offer (NBBO) bid or ask price (depending on whether it’s a debit or credit spread) every two seconds. A Walk Limit order won’t fill the order outside the original spread’s NBBO bid or ask.

The process will take a maximum of 11 steps, canceling and replacing the original limit order every two seconds that it remains unfilled. For example, if you enter a Walk Limit order that has a bid of $2 and an ask of $2.40, the original order will be at $2.20. If that doesn’t fill in two seconds, the $2.20 is canceled and replaced with a limit order at $2.22. That order rests for two seconds, and the cancel/replace process is repeated until the order fills, or until the end price of $2.40 is reached. If the end price is reached with the order unfilled, it will become a limit order at $2.40. The automation saves time and could result in better prices.

The only downside, for option traders with less experience, is that they have to determine before they start the order process whether they’re generating a debit or credit spread. A debit spread is created when the trader will be paying for the order; a credit spread occurs when he or she will receive some money when the order is executed.

Though it could be tricky to extend this function to order types that have more than two legs, or that contain a stock component (such as a covered call or a protective put), it would be great to see the Walk Limit order’s functionality grow. I’d also like to see the ability for the trader to set the start point of where the walk begins, perhaps at a more favorable price than the midpoint between bid and ask. But overall, this is a most welcome addition to the trading functionality at optionsXpress.

TRADEMONSTER, an online brokerage aimed at active options traders, recently began to offer portfolio margining to qualified customers.

Under this system, margin requirements are set based on the risk in an investors’ entire portfolio, rather than regarding each item in a portfolio as a separate entity. Adjusting margins based on how each new options transaction could affect overall portfolio risk can result in lower costs because some new positions could offset the risk of existing ones. TradeMonster’s Website (trademonster.com), provides examples of how the use of portfolio margin could reduce the margin requirements for a specific short calendar spread from $5,162 to $750. That could allow more buying power and possibly additional leverage.

The firm will offer portfolio margin accounts to customers who have a minimum balance of $150,000, after approval of their application. That includes a quiz on the inner workings of the process. Customers must agree to maintain a net liquidating value of $100,000 in their portfolio margin account as well.

These accounts are a welcome component of an active trader’s tool kit.

Published in Barron’s, August 27, 2012. 

Posted by twcarey on 09/01 at 01:39 AM
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