Best Practices

Price Discovery

| Feb 9, 2015
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    Best Practices

    Price Discovery

    Feb 9, 2015

    One advantage of being a retail trader is the ability to do price discovery. Price discovery is the process of finding the best executable price. We want to be able to buy as close to the bids and sell as close the ask as possible.

    Today, Tom Sosnoff and Tony Battista discuss how they are able to use price discovery to keep the best fills possible. First they address whether the mid-price or the natural price is fair value for an options. They explain that when trading liquid option markets we can typically get filled very close to the mid-price, which hopefully won’t be far from the natural in the first place. Wide bid/ask spreads make it much harder to get a favorable fill price.

    Next, Tom and Tony address the concept of moving our price if we are not getting filled at the mid-price. If it’s a trade we must execute, such as closing a trade gone wrong, we may move more aggressively but are always mindful of the cost of a bad exit price compared to the risk of staying in the trade.

    The boys explain that with multiple contracts they may scale in, starting at the mid-price and then shift towards the ask (when selling options). Additionally, we look to liquid strikes within our underlyings (those with high volume and open interest) to assist in our chance of getting filled. Using the tools available to us, we may observe theoretical options pricing to look at adjustments in stock price or implied volatility, especially when looking at earnings trades.

    Lastly, Tom and Tony also go on to details on executing orders on different exchanges and provide a visual of the volume on each exchange. They will often route to “BEST,” so it is interesting to see the breakdown of volume by exchange.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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