Saturday, February 10, 2007

Penny Options Trading Gets Underway

Today was the first day on which U.S. exchange traded options (ETOs) in QQQQ the NASDAQ 100 ETF can be traded in penny increments. Up till now option bid and ask prices had to be in 5 cent increments for options priced below $3 and 10 cent increments for options priced above $3. You couldn't place a bid to buy an option for $3.03. Only $3.00 or $3.10 were acceptable prices. Market orders in options though could actually trade at any price when two orders were crossed. There are a few other stock tickers involved in this pilot program. If it is successful I suppose it will spread to trade in all ETOs.

I've been watching today and the bid-ask spread for the $47 March QQQQ put is averaging 3 cents rather than the previous 10 cents (I have two of these contracts in my Roth IRA account). The spread on QQQQ stock is typically a single penny.

I predict that the volume of options trading will accelerate as a result of this innovation. Relative to buying stock, buying options has meant immediately losing a pile of money due to the spread. The narrowing of spreads should make trading ETOs more attractive. I know I am going to be more likely to trade them in my Roth account now. Trading QQQQ stock requires more capital but still has the advantage of being able to trade pre-open and after hours if neccessary. Futures contracts require little capital, trade almost 24/5 and have narrow spreads during the main trading hours. On top of that they are taxed lower in the US. I still do some QQQQ stock trading in my regular trading account. But over time I am doing more and more of my trades in the futures market.

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