20 Things to Do Before You Ask for a Price (Part 2)
We are back, with installment number 2 of “20 Things to Do Before You Ask for a Price”. It’s a to-do list for the equity derivatives salestrader who chooses to be a relevant and constructive part of the option risk transfer process that a buy-side client and sell-side trader engage in. Small trades – like buying a pack of gum – can be consummated quickly. Large trades – like buying a house – typically take a while. But large trades that are borne in a moment’s notice – that’s a unique thing with unique risks. Things 6 through 10 are about quarterbacking trades to completion in the context of being short information asymmetry. I hope you enjoy and find this useful.
6. Is the order outright or delta neutral? This dictates speed of response needed to the client. There’s more time on delta neutral orders.
7. Check option market depth. Evaluate the screen market using OMON function. How wide are the screen markets? Is the option better bid or offered?
8. Check volume. Use the OMST function to see option volume in the name and that line today. Check open interest in that line to see if the trade is opening or closing.
9. What is the option delta? What is the share delta? What is share delta as % stock volume? Note that low delta options can be challenging to sell from a risk standpoint and that high delta options can be difficult from a stock liquidity standpoint.
10. Check earnings. When does the stock report? Does this option order comprise a report date or other important release of company information? Run the ERN function to look at historical impact of earnings announcements.
Om Podcasten
The Alpha Exchange is a podcast series launched by Dean Curnutt to explore topics in financial markets, risk management and capital allocation in the alternatives industry. Our in depth discussions with highly established industry professionals seek to uncover the nuanced and complex interactions between economic, monetary, financial, regulatory and geopolitical sources of risk. We aim to learn from the perspective our guests can bring with respect to the history of financial and business cycles, promoting a better understanding among listeners as to how prior periods provide important context to present day dynamics. The “price of risk” is an important topic. Here we engage experts in their assessment of risk premium levels in the context of uncertainty. Is the level of compensation attractive? Because Central Banks have played so important a role in markets post crisis, our discussions sometimes aim to better understand the evolution of monetary policy and the degree to which the real and financial economy will be impacted. An especially important area of focus is on derivative products and how they interact with risk taking and carry dynamics. Our conversations seek to enlighten listeners, for example, as to the factors that promoted the February melt-down of the VIX complex. We do NOT ask our guests for their political opinions. We seek a better understanding of the market impact of regulatory change, election outcomes and events of geopolitical consequence. Our discussions cover markets from a macro perspective with an assessment of risk and opportunity across asset classes. Within equity markets, we may explore the relative attractiveness of sectors but will NOT discuss single stocks.