OPTION ORDER FASTER EXECUTION
Small options quantities are very easier to get executed since the price which you are seeing is the price at which one can execute the order. Smaller quantities options can be executed at times at market price for faster execution with the expectation to capture the smallest positive move.
Now things get a little tougher when the same small quantities of options need to be executed with 2 leg option strategy or 3 leg option strategy. By the time one leg is over and you reach the other leg the price at times might have got a drastic move. While working on wafer thin margins one could lose a lot of money from the potential profit. This happens more importantly in 3 legs since by the time all the legs are over there is an impact on the cost of strategy sometimes to our advantages and many times to our disadvantage.
Above situation can still be managed if the underlying is highly liquid. One way to manage the above problem is to enter the market at a time when the market is extremely stable without much movement.
Now the real problem comes when the 2 legs or 3 legs strategy is entered for out month and the liquidity is an issue rather a really concern. In this case, the cost of entering the strategy would have an adverse impact on the option strategy.
MANAGING THE CHALLENGES
To manage the above situation with large quantities is a real big challenge. Even the smallest price change could impact your profitability.
So where is the solution? How do we manage the orders?
What we require is the speed of execution, limiting the risk, provide price improvement option, to time the market and simplify the trading process.
All this can be done but not by a human but Algo trading. Algo trading is computer executing trade order as per the instruction of the trader. This reduces the redundancy and improves the price discovery mechanism, along with limiting the risk of wrong execution. Usually, Algo trading is a service offered by your broker. Most of the broker offer Algo trade but at a specific charge which ranges from Rs. 5000 to Rs. 12000. Initially, this charge looks very high but when you trade quantities of 4000 lots and even if you save 3 rupees in execution your entire amount is covered in a single transaction.
Would not get into intricacies of Algo trading as this differs from broker to broker.
Zerodha has its own platform which is named Zerodha i3
Zerodha’s Execution based Algorithms can be found here.
Do let us know if you want us to cover any specific topics related to Algo & OptionsTrading Strategies.
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