thinkMoney - Winter 2018

themselves a better chance to make money.

You might see narrower bid/ask spreads for options on stocks that are actively traded and have narrow bid/ask spreads themselves. Those options may have open interest in the hundreds, or even thousands, so there are potentially lots of participants willing to buy and sell that option.

That said, when you trade, you want to get the best price—meaning a lower price when you’re trying to buy an option, and a higher price when you’re trying to sell. If you see a narrow bid/ask spread for an option, say, $0.02 or $0.01, you can buy or sell that option and give less edge to the market maker. Combined with high open interest, an option doesn’t get more liquid than that.

A wide bid/ask spread might signal caution is prudent. For example, if it’s $0.10 or more and has low open interest, you may have a tough time getting filled in between the bid/ask spread, and may have to give the market maker more edge when you do a trade. That increases trading costs above commissions.

Find Your Edge

When open interest is low and bid/ask spreads are wide, you might consider moving on to the next trade. Chances are no one wants to play unless they get an edge for taking your trade. So, take your ball and go play somewhere else. —Words by THOMAS PRESTON

Deciphering the Data
BIG IDEA: WERE THE TRADES CALLS OR
PUTS? WAS A SALE AT THE BID OR BELOW,
AT THE ASK OR ABOVE, OR BETWEEN
THE BID AND ASK?

Thomas Preston is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.

For more on the risks of trading and trading options, see page 37, #1– 2.

• What can you gain from knowing the details of every trade that took place in an underlying during a given trading day? At a high level, you may get a feel for volume (the size of trades) and momentum (the flow of trades). Wondering if sentiment is bearish or bullish? If you notice a lot of trades above the ask, then sentiment may be leaning toward the bullish side. If trades are taking place below the bid, sentiment may be more bearish. You may notice some unusual trading activity; maybe there were some large orders at a specific price. But it’s a lot of data that scrolls very quickly. The “Options Time & Sales” tool in the thinkorswim® platform from TD Ameritrade can help you organize this data and make sense of all the little bits.

COOL TOOLS

For the latest release notes and thinkorswim how-to videos, go to tlc.thinkorswim.com.

Source: thinkorswim from TD Ameritrade. For illustrative purposes only.

GEAR HEAD • SEASONED

1 – From the Trade tab, select All Products and enter the symbol of the underlying.

2 – Expand the Options Time & Sales section.

There’re two categories here—"Today’s biggest” and “Time.” Today’s biggest finds the largest call and put trades for the current trading day.

MAKE SENSE OF OPTIONS TIME & SALES DATA:

Time lists all the trades chronologically.

3 – The data is color
coded:
Blue = calls
Purple = puts
Red = trade took place
at bid or below
Green = trade took
place at ask or above
Yellow = trade took
place between the bid
and ask
Some traded options
have a shaded back-
ground. This shows if
an option was in the
money (ITM) or out of
the money (OTM).