Financial advisers can gain an edge for clients by applying simple principles when executing orders for Exchange Traded Options (ETOs) on the ASX. Each time advisers place an order, they are interacting with a sophisticated market structure so gaining an understanding of its mechanics can optimise returns. Below is a rundown of the key factors to consider.

Watch the time:

Market makers play a key role in maintaining liquidity and price efficiency by providing ETO quotes during the trading day and updating their prices to reflect changes in the underlying market. But they are only obligated to provide the pricing in set windows: 10 am to 4 pm for single stock options, and 9:50 am to 4:30 pm for index options.

“Avoiding the first 20 minutes of trading for single stock options may be appropriate unless the market is likely to move away from you. Bid-Offer spreads are wider in that period but generally tighten after all equities are online and trading has settled”, says Lewis Taie, Senior Manager, Derivatives Program at AUSIEX.

Likewise, it’s prudent to avoid trading single stock options after 4 pm as market makers are unable to trade the underlying equity to hedge their position. This means they need to take on extra risk for a trade after 4pm, and will build that into the price. 

Understand quoting:

The ASX ETO market has a dual quoting structure that allows either ‘continuous quotes’ or ‘quotes on request’.

‘Continuous quotes’ provide a live bid and offer for many ETO series during the windows in which market makers are obliged to operate. An ETO series refers to a group of options contracts, all with the same underlying asset and expiration date. 

Continuous quotes are generally used for series where their strike price is near the underlying spot price or those near expiry (for example, within 1-3 months of expiry).

Series that are further out of the money, or in the money, are more likely to need a ‘quote on request’. The same applies to options with a longer dated expiry. 

In these situations, there’s no bid or offer available on screen. To get a price, you need to contact your broker. They will then send an electronic message to a panel of market makers who will provide a bid and offer for a short period of around 15 seconds.

This dual quoting structure means that even less-traded options can still be priced and traded in a relatively efficient manner.

Start in the middle:

An important aspect of ETO trade execution is the price at which trades are filled – that is, whether they occur at the midpoint of a bid and offer or by crossing the spread. Understanding the difference can impact your client's profitability. 

“It’s common with equities to make buy or sell orders ‘at market’, which means you take the best available price. It’s different with options. Counterparties will sit in the screen and set their price relative to the price of the underlying security”, Mr. Taie says.

“You can get a better outcome by placing your order at the midpoint and gradually ticking the price up, instead of just taking the available price. When you get close to the offer or bid, the counterparty will often come up or down and hit you first”, Mr. Taie says.

There is a caveat to this rule: it works well for smaller orders but may be inappropriate for larger orders as it flags the trade to others in the market, potentially impacting the price you’re offered.

Go bigger:

If your trade is large enough to qualify as ‘special size’, it may be worthwhile asking your broker to execute it off-screen using a block special crossing to avoid flagging the trade. The special size thresholds are set by the ASX and vary for each ETO. For example, the special size for CSL single stock options is currently either 450 contracts or $1 million premium.

Advisers could aggregate small orders from different clients into a single trade using the special size provision to get better outcomes.

“It can also make it more efficient for advisers from a position management standpoint. If you place an order in screen, there's no certainty on how much will get filled. For example, if you want to trade 1000 contracts but can only manage to trade 450, you will need to manage the residual”, Mr. Taie says.

This is most important if advisers are aiming to hedge with options, take on additional risk or manage a position through to its expiry. In these instances, trading in partial amounts can be a complex process that requires more focus from an adviser.

Ask for more:

It’s possible for your broker to ask the ASX to create a new options series if there are none available with your desired strike price. This might be the case if an adviser wants to trade a deep in the money or a deep out of the money position – for example, they might think the share price of company will rise and wish to trade a contract with a strike price of $250 but only be able buy ETOs with a strike price of $240.

“AUSIEX is asked to request a new series 1-2 times every week where clients are looking to trade options with a strike not currently listed”, Mr. Taie says.

Advisers who genuinely understand ETO quoting mechanics, seek to optimise their trade timing, and actively work to minimise slippage can deliver measurable and superior value to their clients. This is particularly true for those managing high-volume portfolios or implementing sophisticated risk management strategies. 

For more information on Options strategies or Options trading, please get in contact with a member of our Business Development team or call 1800 252 351.