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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: Thomas Winklhofer who wrote (18062)	4/21/1998 12:53:00 PM
From: IQBAL LATIF	Read Replies (1) \| Respond to of 50167

Dear Thomas: Sorry for coming back late to you. I just wanted to check Question 2 before I answer your question 1. I was checking with Raj if there was any way to back test your option trading model, but I did not find any source of historical option prices. With experience of course I do remember some prices and I have some prices from my record but, otherwise, as a source, where these prices are registered, one cannot find a source. Now, the answer to your Question 1: I've just checked the prices on RUT options; its trading at 490 right now, there is some trading activity like 40-50 options, but however, the spread is three-fourth of a dollar, like May 490 call is 8-1/2/9-1/4, that is a spread of _ dollar. If you compare it with OEX, it is trading at 540 and traded 2030 options for the month of May and the bid and offer is 87/8-9, that is, the spread is only 1/8. The problem with RUT is that it is very illiquid, hence the spread will be very high. From my experience I know that RUT in Dec/Jan/Feb has not followed SPX. I was just now trying in New York to superimpose RUT on SPX and I got the fax. I could see the divergence between RUT and SPX. At the moment both look in uptrend, but if you go back to Dec/Jan/Feb, they were not moving in the same direction. In my opinion, RUT and SPX is a difficult model as they are different products. S&P constitutes companies which are 500 top names in the US market, like MSFT, INTEL, where Russell 2000 are fledgling companies, upcoming new products. So the macro-economic impacts on the two indexes is quite different and does not have the same impact. Rising interest rates would hit S&P big but it will hit the Russell 2000 much harder. Russell 2000 has a lag factor, it takes some time before it catches up with S&P. For what its worth, my opinion is that there is bound to be a divergence. A lot of good news is built in S&P whereas that equivalent amount of optimism is not built in Russell 2000 still. So, if we move upward from here, I will like to coordinate RUT with Composite, like for me, 1900 is a resistance, and it will take some time to take that out, whereas, S&P might fail on 1130 without making too much of an impact on Composite. You need to keep an eye on this divergence possibility. On the question of market-makers, how much options they're ready to take it is 10 on bid and offer side. The only difference is that if you give an order for 100 contracts of RUT he might deliver you some on the market price which may be more than 10 but others he may jack up the price. On the other hand, more liquid contracts like OEX and SPX, because of share liquidity and volume you will not face this problem. But of course, even in absence of volume you can see that RUT, OEX and SPX, all trade and you can buy and sell, but the only problem is the spread. You will be making your profit with a big move only, that is one of the major handicaps of illiquid options. Whereas liquid options, due to closer spreads, you do make your money even on smaller moves. Sorry if this does not adequately answer your question. I have tried to, like a devil's advocate, raised issues so that you can better your model. If you have any further questions, please don't hesitate to ask. Ike