Trade Execution and Trade Fill Prices (Part-1)

Yesterday we initiated a Pre-earning trade on LULU and by the end of the day, the trade was up +70% vs. lowest mid prices, +32% vs. maximum suggested price and +15% vs. actual member’s fills that OPN uses to track its P&L.

Think about it for a minute. +70%, +32%, +15%? All within a day! For the same trade, and for the same members! How could this be possible? this triggered a long chain of discussion with members. Naturally, the conversations kicks-in whenever there is a “missed” profitable trade vs. when there is a filled trade for cheaper prices (vs. trade idea). Thus this triggered me to start writing a series of posts on fills and trade execution to share my experiences and provide some insights on this valuable area.

I am often asked how to get good fill prices? What kind of fill prices are used for calculating OP Income Newsletter’s performance? Should we chase for better prices? What is the maximum (debit) or minimum (credit) we should aim for? What if I am filled on half and not filled on another half etc.?

Almost 6 years ago, OptionPundit introduced “forum” concept for the newsletter members and took ACTUAL median fill prices posted by MEMBERs to calculate respective trade’s P&L. unlike others who were using theoretical fills or their own fills. We were so confident of our trades that we opened us ourselves to member’s scrutiny all the time.

Why was it important?

An author will always have an advantage over subscribers. He knows the underlying, he knows the set-up he has in his mind, he knows what is he looking for and may choose the best time to enter. He can also easily front run members and use the best fills to calculate the performance. By using trade fills prices from Members, it becomes completely transparent and then P&L are more realistic P&L.

This LULU trade is a great example. Using mid prices before sending trade idea, I can show a +70% gains vs. actual performance of +15% based on our member’s fills. We choose +15% as that’s what reflect real trade performance of those who are “following”.

There is one more check-

Is the author entering his orders after a trade idea was sent or before that?

If it is before a trade idea is sent (for theta/ vega positive trades especially), members will almost never be able to match his performance. Soon after the trade idea is sent, members will queue up their orders affecting the prices/volatilities and in most cases members will end up paying more for such trades. And it was this reason that we introduced “paid” waiting list concept to limit the number of subscribers.

And of course, the forum also helps in terms facilitating learning. We have since then launched 4 series of “Real lessons from Real Traders in Real Time” series.

Forum was also important as we open up ourselves to member’s scrutiny, all the time. It also provides an opportunity for members to review their fills vs. other member’s fill; they can review how their broker is performing vs. other member’s broker. They can review all the comments that were made, all the adjustments, all the reasons behind those.

So how does OPN share the trade idea-

Sell to open (– %) – RUT Iron Condor Oct 2013
– Sell to Open RUT Oct Call 1080
– Buy to open RUT Oct Call 1090
– Sell to Open RUT Oct Put 945
– Buy to Open RUT Oct Put 935

Total credit: $3.20 +/- (mid as of this writing)
Pls don’t accept credit < $3.05

Additional details -> — spread per 10k and thus — % of the portfolio. Please don’t increase allocation beyond — % of the capital if portfolio is > $75K. For portfolio > $100K — . This is slightly short delta trade. We’ll adjust when —.

And once members start posting their fills on the forum, we’ll use median fills to track its performance.

Though Mr Market doesn’t owe us anything. Market makers/participants will do what’s best in their interest even though you have a fair price request. There is no magic bullet. Trade fills are more of an art vs. exact science. In the next part, I shall share with you my experiences on what you could do to obtain better trade fills.

Should you have any questions or would like me to cover anything in particular, either post your views in the comments section or do send me an e-mail -> Ask@OptionPundit.com

Trade carefully, Trade profitably, OP