There is some validity in your comments as it relates to ABX,there is a reasonable volume and variety of options available and the stock is reasonably volatile, which is great. My experience with other options has not been as good. Maybe I have only bought the "dancing ladies" in the U.S. and the dogs in Canada but I will give you 3 examples of items that point to an illiquid market. I purchased 40 contracts of Wascana @ $10 with less than 2 months to go with the stock just over $9. I was the market and there was no other open interest so in effect the market provided for the right to purchase 4000 shares on one of the larger Canadian oil companies(I grant you this was a few years ago as you can tell by the price). The stock moved and the premium evaporated even though there was a significant period of time left to expiry. The stock was hot but no one cared.
Try and take a long position on a bank stock and purchase a put(a leap) for insurance. I looked at this a few years ago and the numbers on paper looked very good but the open interest on the leaps was so small and the spreads on the leaps were so large with the potential to increase that it made it very risky, I felt, to execute the transaction. On paper, you could borrow and the dividend income on an after tax basis would offset the after tax interest cost and all or a portion of the put cost. There was limited exposure with reasonable upside but I couldn't see any way to get in.
I bought TSE 35's before the referendum and after the results were out, I had no way to trade for a significant period of time after the market opened. I was told it was a "fast market" and they were trading in series and by the time they got to my series, the value had dropped considerably$5000 to $10,000 on a $4000 investment. Given the volume of the index options and the numbers that normally trade, I could not understand the delay which was essentially for a couple of hours, I believe. If it was the system, why trade in a market where the system can't handle the volume. If there were other reasons, lets establish the rules up front. Don't make them up as you go because the volatility level of that day has been repeated many times since.
The above are examples from 2 to 3 years ago( and longer with respect to Wascana) so maybe things have gotten better but hitting the offer and having the bid automatically increase with no corresponding increase in the stock is also tough to take and that has also happened to me. Therefore, I backed away from the Cdn market which I regret greatly. You seemed hostile that someone would have the nerve to suggest there is a problem. I would suggest that the above are real issues; I am a small investor who likes what can be done with options to protect a position so I would love to buy here but I have to know I can get in and out. I suspect there are others out there like myself who feel the same way.
TommyD |
