Open Vs Close? Scalping Options

By Frank Walsh

"Are you opening or closing?" "Sorry, but NONE of your business." This was an almost constant dialogue in our CBOE trading floor days - especially on "size orders". The market makers always wanted as much information as to who and why was on the other side of their trade. And being the floor broker ON that other side, it was our job to fill the order to the best of our ability, AND to protect our customer's information.

Now, some 25-years later; after an enormous amount of dramatic changes in the options "game", information such as this, is still mostly kept under wraps. On Tuesday (9/7), for instance, when 100,000 of this week's Apple (AAPL*) 157.50 calls traded, by checking the time-

and sales, an interested trader might be able to tell if they were bought or sold - by the price. If, in this case, they traded on the BID price, they were being sold, and if they traded on the OFFER price, they were being bought. The time-and-sales feature on the thinkorswim platform is full of timely data on trades (spread, straddle, buy/write, combo), but some relevant information is still unknown to everyone but the traders on each side of the trade.

In fact; for years, we have been asking the exchanges for open interest changes INTRA-DAY.

Perhaps hourly.

Still, this would only allow the customer to know if the above 100,000 contracts, for example, were some adjustment to a current position, or if they were being "scalped". If, in this case, the existing open interest (at the time of the trade) was 78,000, and the open interest (the next morning) was still about 78,000 - this would mean the 100,000 that traded were probably being scalped (intra-day traded), NOT necessarily position adjustments or versus other options or stock. This, of course, would also preclude any possible exercise.

In the first 40-years or so of options trading, scalping options was VERY VERY difficult, and unless you were on the trading floor, it was rarely done. Not only have the electronics changed options trading, but for many reasons, scalping is now one of the more popular vehicles for the relatively new millions of worldwide online traders.

Why is scalping options becoming so popular? Of course, the main reason might be the commission structure; options can now be traded in-and-out successfully with a much smaller price differential, as the old $1.00 - $10.00 per contract costs have been sliced substantially.

Not only have the costs of trading been cut, but so have the bid/ask spreads, with many underlying now trading in pennies. Dollar wides, weeklies, bigger volumes, leverage, and instantaneous fills (many times with price improvement), are among the other upticks for today's customers when scalping options.

Of course, as always, with any new product or strategy, like scalping - a PAPER MONEY account must be employed before entering real orders.

FHW

(fhwoption@hotmail.com)