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More options observations/questions. Just how, I wonder, do the market
makers work? Here's something I've noticed more than once (though I've
never followed it closely enough to draw any real conclusions): after
the market close, but before the close of the options market, bid and
ask are adjusted even if no more contracts are traded. Usually both are
lowered. In the morning I see the opposite. For example, the other day
when I was considering SEGFIs (just as well I didn't do it), they were
supposedly asking 1 7/8 just before the options market opened (this
according to my broker's info as well as my own). The stock was flat.
But when I checked later in the day I saw that the contract actually
opened at 2 1/8. This is especially annoying, as you don't know what
you'll be paying if you put in a market order at the open.
As I said, I haven't kept track of a representative bunch of specific
examples, and so I may be imagining things. Any thoughts?
Janice,
This is my understanding on how this works but is definitly not definitive nor have I read documentation to prove it. With that disclaimer in mind so no one beats me up, here I go<G>
The first 10 contracts on both the bid and ask size are adjusted relative to the underlying security by a computer. The amount of premium is pre-programed based on time, the volitility of the underlying security etc. The market maker does not have time to change the bid and ask of the option everytime the underlying security moves due to the fact of so many option values that would change. All the different expirations, strike prices, etc.
Once the underlying security closes during normal trading the bid and ask of the underlying security changes in after hour trading and the market maker's computer adjusts the options accordingly. This also occurs when the market opens. The underlying security does not always or even often open where it closed so the option moves accordingly. This again is the first ten contracts. It is also my uderstanding the market maker has to execute the first 10 contracts of an option order even if he or she has discovered a pricing error. The market maker has the choice to change the bid and ask of an option if the order is more than 10 contracts. With this in mind if you like the bid or ask of an option and are buying or selling but wish to do more than ten contracts, do the first 10 as a separate order. Any more than 10 will have the computer flage the market maker and he or she may adust the bid or ask of the option for the entire order. Does this at all help explain what you have noticed or is it really not related?<G>
Glenn
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