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Thursday, November 23, 2006

PSS - Why Spread Is Wide???

I was watching PSS after it gapped up on earnings report and is now trading at all time high. Had wanted to enter on NRB 6th bar high (on 15 min chart)supported by upward 5 EMA and also a 5th bar hammer. Initial stop would be below 6th bar low. Did a check on the option chain for Dec 25 Call and I was turned off. Option priced at 5.5-5.9 => 0.4 spread!!! Clueless why this stock which has an average volume of abt 1 mil and open interest of 1,403 has such wide bid-ask spread. Can anyone throw some light on this?

The 25 Call is deep ITM with delta @ 0.94. This would have been my chosen strike due to the following reasons:

-It is a slightly higher risk setup as the entry is below OR high
-On eve of Thanksgiving, I'm not sure how market will behave later and how far this stock can move
-Dec 30 Call delta @ 0.6 only. And because of the above 2 reasons pointing to higher chance of uncertainty, I would prefer to have a higher delta to capture as much gains as possible

As I'm writing now, PSS is climbing up nicely (slightly over $31) and Dec 25 Call is now worth 6.0-6.2. Bid-ask spread has narrowed down somehow. Of course I could have tried to enter the trade with a in-between price of say 5.7, but my concern is more on the exit part should the trade turn sour. I wouldn't want to assume that the spread would narrow down when I want to exit.

(Edit: chart added. Looking back, PSS behaved really well, moving along the 5 EMA nicely. If I have taken this trade, would probably have taken profit at 18th bar low and 21st bar low)


Blogger Phileo said...

Hi SimplyOptions,

Thanks for pointing out one of your criteria for using delta to decide which options to buy for a given underlying. I will be exploring that idea further in my own trading.
As to the bid-ask spread, I have found that placing a limit bid in between the spread works more often than I thought. Of course, as you implied, you almost have to work out some sort of an exit strategy before you put in our buy order.

11:44 PM  
Blogger Simply Options Trader said...

Hey Phileo,
Thanks for dropping by.

For daytrading, I'll prefer to trade with have options deep ITM. For swing trades or momo trades, ITM will do.

Totally agree on limit order. I was worried that if the trade turned against me, my losses would have been bigger than what I set in the system because of the wide spread. That's the last thing I want before I go off for my holiday, lol!

9:35 AM  

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