As most traders and investors are aware, the ASX was down last Monday after moving to a new system. Though the market resumed trading the next day, many issues remain.
For us Options traders, the biggest issue yet to be resolved is the ability to execute a Tailor-Made Combination order (TMC). With no announcements from the ASX, this issue could persist for a while and so we must address it.
Scroll down for a better understanding around what a TMC is and why they are important to Options traders.
What do we do in the meantime?
We can call the market makers, for our clients, and agree on a net price with them in order to make sure combination orders are filled at good prices.
This also means that the process is less efficient, and you will need to be more patient.
Options spread recommendations
As part of our obligation to our members, we will still strive to provide spread trading recommendations where appropriate.
However, the process will change until TMCs are fixed:
- Instead of putting out the recommendation after 2:00pm, we will likely put it out after 1:00pm
- We will have a cut off time of roughly 3:15pm (AEDT). You will likely not be able to participate in the spread recommendation past this time.
- Orders given by clients in the time between when the recommendation is sent out, and 3:15pm will be collated.
- After 3:15pm, we will call the market makers and hopefully workshop a price to fill the collated orders.
- Until TMCs are fixed, if you agree to a spread trade recommendation, you are agreeing to this process.
Alternatively, you could forgo participation, call an adviser and workshop a different strategy of either a single leg Option or Mini Warrant.
What is a TMC?
A TMC (Tailor-Made Combination) is made when a trader wishes to execute an Options trade with two or more legs. Instead of transacting each leg individually through two or more orders, these legs are done as one order through a TMC.
A trader wants to place a Bull Call Spread on ANZ:
Each leg has its own Bid and Ask and therefore mid point that represents fair value.
Bull Call Spread
Sell 22.50 Call Mid is $0.1775
Buy 20.50 Call Mid is $1.7725
Combo Price Mid $1.595DR (1.1725 – 0.1775)
A trader could execute each of those legs individually. Or instead, they could create a TMC order and execute both at the same time, trading at the combo price (1.595).
Unlike stock, a trader of Options can almost always get filled between the Bid and Ask near the fair value. But where they get filled largely comes down to a bit of a negotiation between the trader and a Market Maker, whose job is to fill orders. Even though we try to get filled at the mid point on an Option, generally we have to give a little bit of discretion to get filled.
If a trader was to get both of these Options done in the market separately, they may need to give a few cents on both legs which might mean they pay 4 or 5 cents more than the mid.
TMC combos are a way to avoid this. We are able to interact with the market at the 1.595 combo price and then often get filled, giving much less discretion.
Example One- Results of transacting individual legs
Sell 22.50 Call Mid is $0.1775 – Filled 0.15CR
Buy 20.50 Call Mid is $1.7725 – Filled 1.80DR
Combo Fill Price 1.80 – 0.15 = 1.65DR
Example Two- Results of transacting legs as a TMC
Buy – ANZ Combo ANZ100 – mid 1.595 – Filled 1.61DR
Combo Fill Price = 1.61DR
This is what we see commonly happen to Options traders if they try and fill the legs separately compared to as a combo. 0.04c represents paying an extra 2.5% entering the trade.
You can see why as Options traders we are hoping that TMCs are fixed soon.
If you need any further assistance please contact the desk on 03 80805788.