The Harvested Community
Vol #14- November 6th, 2020
Hearing how different investors are using options strategies is perennially and uniquely fascinating.
Not only are there a million strikes out there to trade, but there are at least as many different ways to trade them. There are even more different investor personalities and objectives.
Our motto is “derivatives are for everyone” and that means a mission to create a product that allows clients to easily and intuitively access options strategies. Feedback is absolutely critical here.
In order to offer a service that meets the needs of investors we must listen carefully. To do that better, this week we’ve started a Facebook group to help foster this conversation, and provide another avenue for customers to reach us.
While myself and the team are always available to chat, we wanted to have a place where clients and potential clients could talk amongst themselves. We’ll be there to help guide the conversation, and respond to suggestions, but using this medium allows everyone in the group to see the discussion.
We care about all the little details here, and are looking forward to hearing your thoughts. Whether it’s a way to make the sign up flow easier, a question on model portfolios, or maybe just a book recommendation on options, we want to know.
In addition to being an avenue for feedback and suggestions, we’ll be highlighting interesting content and events that Harvested is producing. We’ll be scheduling regular ‘office hours’ where someone will be around for live chat.
The feedback that our clients are providing on a daily basis continues to make our platform stronger, and we’re looking forward to getting more. I hope that everyone considers joining us here, whether you’re currently working with Harvested Financial or still considering it.
Thanks for joining us,
Mark Phillips
CEO
What clients are asking us:
How do you identify products to trade?
Liquidity is very important in options strategies. It’s not only about getting into a trade at the right price, but being able to exit that trade profitably. We look to the most heavily traded benchmarks, because the price you pay is the ultimate determinant of profitability.
Can I build a custom income strategy?
Investors use options to generate income in many different ways. Whether it’s selling calls against stock, spreads, or cash secured puts, there are lots of was that options risk allows investors to earn alternative returns.
We have a variety of solutions for investors looking to manage their options strategies, whether it’s model portfolios or custom strategy design.
Happy Friday!
There’s been a lot of talk of counting this week. To distract everyone from the map game, let’s talk about how options contracts are counted.
When there’s one buyer, and one seller, it’s easy to know who’s going to make the trade. But when there are more people interested in buying or selling, it starts to get a little bit more complicated.
Having multiple interested parties to a trade helps everyone. The more competitive liquidity there is, the better the trading experience will be for everyone. Customers can enter their trades at a fair price, assured that dealers are competing to be their counterparty. Dealers can be confident in providing good prices, knowing they have opportunities to make other similar trades and manage their positions efficiently.
As crazy as the pictures of the pits look, there is a lot of order and procedure in how trades get divided. While the pits are quiet today, dealers are constantly updating their electronic quotes for where they would buy and sell. At any given time there may be multiple institutions interested in trading a given contract at a certain price.
There are two major models for exchanges to divide up orderflow, and they aim at building different types of liquidity. There are pro-rata exchanges that divide up orderflow based on size, and price-time exchanges that divide it up by who was there first.
Imagine a customer order to buy 10 contracts comes to a pro-rata exchange. There are 3 dealers each offered to sell at that same price; A has 30, B has 30 and C has 40 contracts. When that 10 lot order comes in, they get 3/3/4 respectively. Their allocation is proportionate to their size.
Now imagine that same exchange is price time. If dealer B was the first person to offer her 30 contracts at that price, she would take the entire trade. Priority goes to the dealer or customer who was the first person to set that price. If the first size is exhausted, then other dealers participate in time priority order.
Pro-rata exchanges help build size. Dealers are encouraged to show bigger size so they can get bigger allocations. This means customers can trade swiftly for large order sizes. Price-time on the other hand encourages competition on price - being the first to set a new level rewards you with your full size ahead of other participants.
Different customers need different models, and they combine to create a robust options market place. Liquidity in both price and size terms is important. There’s no right answer for which way of counting trade allocation is better - they meet the needs of large and small investors alike.
To paraphrase John King’s electoral method quip - it’s not positive or negative, it’s just their procedure.
