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Issue No. 39 – August 15, 2005 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
Below describes how an unattended sell order can induce an under priced options premium.
1.1 Unattended Sell Orders
The title of this could be “How Not to Sell an Options Contract”. It involves a recent experience I had while holding a call option in a rising market. The level 2 screen showed that most traders had their order prices programmed, no matter which exchange they were trading. They had at least two criteria for submitting and modifying bid and asking prices. One was to modify submitted prices as function of the option’s intrinsic value or the theoretical fair value. Another was to always bid a fixed amount below the lowest asking price, possibly to insure getting in at a bargain. Likewise, sellers were obliged to always submit asking prices a minimum fixed amount above the highest bid, no doubt to make sure they were not selling the contract too cheaply. The result is a constant bid-ask spread that slides upward and downward as the underlying stock price moves in either direction. It is fascinating to see this “dance” operate like clock work, although it can be rather frustrating and appear as a mystifying game at first.
While waiting to sell my single call contract, the underlying stock began to rise sharply and continually. As I watched the bid-ask prices move upward, I got my sell order prepared and had my finger ready on the keyboard. Lo and behold, I noticed a single contract sell order that did not move up in price as the underlying stock price continued to rise. It seems that one intrepid trader decided he had had enough of the bid-ask “dance” and decided to just enter his sell order at a fixed price and leave it there until executed. Other seller’s prices continued to rise with the underlying. But when bid prices neared the fixed seller’s price, they suddenly backed away, even as the underlying stock price continued to rise. You could tell these buy orders were preprogrammed. And obviously the solitary fixed asking price seller had entered his sell order and walked away from the computer. I waited the rest of the trading session for this impasse to resolve itself. But it did not that day. The closing bid for the day remained the same amount below the now under priced fixed asking price while the underlying stock and all the other asking prices had advanced to astronomical levels.
© 2005 Desert Mountain Systems, LLC. Members of wisertrader.com are neither licensed brokers nor licensed advisors. Trades discussed represent recommendations made by the editor for the wisertrader.com portfolio. The newsletter and web site are for information only and should not be considered as personal advice. While it is believed that the posted information is factual, mistakes can be made in transcription. Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser. Desert Mountain Systems markets third party trading systems but has no other affiliation with trading system companies.
It is well established that one should not post large stop orders where market makers can see them because of the temptation posed to gun for the stops. This occurs routinely in the Forex markets. As order processing becomes more automated it may become less of a problem. Yet automation with programmed order adjustments can present some unexpected nuances of their own. One solution might be to use text messaging from a broker, to a pager, email or cell phone, to inform you when a price or bid has reached a target level. Once the target is reached then you can look at the situation directly and decide if you want to place a sell order or hold off for a better price. Placing an unattended order may have unintended consequences when programmable order adjustment software is taken into account.
2.0 Market Analysis
The Fed policy statement this week really brought nothing new to the market. The stock market improvement is mostly attributable to the continued impact of the bullish underlying factors of strong profit growth and an accelerating economy. The outlook for the market remains highly uncertain. It is a surprised that it has held up so well in the face of the surge in oil prices. August is typically a weak month for the market and the market very well could be in for some choppy action through the end of this month. The week ahead brings the CPI and PPI reports, as well as industrial production data, but the earnings calendar is light. Figure 1 compares index tracking stocks for the major averages with Sector SPDR’s.
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FIGURE 1
Relative strength is given in Table 2A.
Table 2A
Relative Strength Index
|
|
5 Day RSI |
|
DOW |
Neutral |
|
S&P 500 |
Neutral |
|
NASDAQ |
Neutral |
Market sentiment is shown in Table 2B. Volatility has increased.
Table 2B
VTO Market Sentiment Indicators
|
Sentiment Indicator |
Current |
Last Week |
2 Weeks Ago |
Complacent |
Cautious |
|
VIX ** |
12.74 |
12.48 |
11.57 |
< 20 |
> 50 |
|
VXN *** |
15.63 |
15.40 |
13.87 |
< 30 |
> 70 |
|
Put/Call Ratio |
0.625 |
0.551 |
0.560 |
< 0.6 |
> 0.7 |
|
%Bulls - %Bears |
39.8% |
34.8% |
33.3% |
> 29% |
< 20% |
|
** Above 20 day SMA = Sell signal. *** Above 20 day SMA = Sell signal. |
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Figure 2 compares index tracking stocks with five leading ETF’s for the week.
FIGURE 2
Industry leaders in Table 2C rank from highest to lowest.