This doesn't add up, could anyone explain? | Forex Factory

Options

Permalinks
Print Thread

Similar Threads

Could anyone explain Business Cycles 0 replies

could anyone explain what does tick mean? 5 replies

Can anyone explain this indicator from DeMark to me? 7 replies

Can anyone explain the 200 ema system to me? 2 replies

can anyone explain me? 7 replies

Attachments: This doesn't add up, could anyone explain?
Exit Attachments

This doesn't add up, could anyone explain?

  • #1
  • First Post: Edited Nov 15, 2012 5:21am Nov 14, 2012 3:13pm | Edited Nov 15, 2012 5:21am
I'm experimenting with some trades (albeit on a live account with a small four figure sum. I appreciate the risks with my "learning capital"). I made about 25% in the last couple of weeks following some of the advice in various threads here. Call it beginner's luck. So I've got a few hundred pounds I can take a bit of risk with.

Something smelled fishy so to test it I opened a couple of opposing trades using the smallest size allowed. One was a long on the FSTE Mar 2013. The other was a short on the FTSE Dec 2012. They were made slightly apart.

So the net position on the account is -£65.00. That, to me, should stay constant till I pull out of one of the trades. However, it seems to go up and down. Why's that? The relative charts are moving in tandem, the spreads haven't changed. Why should the balance fluctuate?

Thanks in advance.
  • #2
  • Nov 15, 2012 4:17am Nov 15, 2012 4:17am
You seem to be working on the assumption that all option prices move in lock step with each other ignoring different expiry dates.

The price of an option is based not just on the underlying asset price but also on the time to expiry.

A rather artificial example should make the reason clear.

Assume that with 5 days to the December expiry the FTSE is 100 points short of your strike price and does not then move over those 5 days, this way we can see the time effect in isolation.

What's going to happen to the December option price over those 5 days? It's going to drop rapidly to essentially nil because as time runs out the likelihood of the 100 point gap being closed evaporates.

Compare this with the March option over the same period, here there is plenty of time remaining for the gap to close (or widen) and so the option price will be comparatively unmoved.
Too tired to argue. Too old to care.
  • #3
  • Nov 15, 2012 4:55am Nov 15, 2012 4:55am
Hi David, and thanks for your reply.

You have a valid point and I accept that an option with different expiry dates may not necessarily move in lock step. That's why I opened both charts side by side. They were moving in perfect harmony at the time (which is what I meant by "in tandem") and if you overlaid one with the other you'd see just a single line.

Yet the net position on open trades kept fluctuating by about £10-£15. My initial suspicions were that there's something in the broker's software that's not 100% right. I was hoping you experts had another explanation.
  • #4
  • Nov 15, 2012 5:29am Nov 15, 2012 5:29am
Quoting WideEyed
Hi David, and thanks for your reply.

You have a valid point and I accept that an option with different expiry dates may not necessarily move in lock step. That's why I opened both charts side by side. They were moving in perfect harmony at the time (which is what I meant by "in tandem") and if you overlaid one with the other you'd see just a single line.

Yet the net position on open trades kept fluctuating by about £10-£15. My initial suspicions were that there's something in the broker's software that's not 100% right. I was hoping you experts...
so do you understand now or not?

it sounds like you didn't (or maybe still don't) get the difference between an option and the prices the options are based on. it's like betting on a horse race that is already in motion. you get crap odds for the horse that is leading since it is most-likely going to win and huge odds for the horse coming last because it is unlikely to win. in the meantime you can also sell your bet to someone else for whatever the odds currently are at that time. whoever holds the bet once the horse crosses the line doesn't get paid the distance the horse ran, they get paid if the horse makes it to the line on time modified by whatever odds they paid when placing the bet, or they lose the money they bet and walk away.

i probably screwed that up, but that is the gist of it.
Congratulations ScalaFX for coming out of the closet!
  • #5
  • Edited 7:17am Nov 15, 2012 7:05am | Edited 7:17am
Quoting nubcake
so do you understand now or not?

it sounds like you didn't (or maybe still don't) get the difference between an option and the prices the options are based on. it's like betting on a horse race that is already in motion. you get crap odds for the horse that is leading since it is most-likely going to win and huge odds for the horse coming last because it is unlikely to win. in the meantime you can also sell your bet to someone else for whatever the odds currently are at that time. whoever holds the bet once the horse crosses the line doesn't...
Sorry nubcake, I do understand the difference. And I can appreciate that options may move differently to the underlying security. I don't know how you got the idea that this is related to my query.

Maybe it's my poor use of terminology and the use of the word "option" in my last post - in reply to David's use of the word - has caused some confusion. My original post makes no mention of "options". There are no options involved. No puts, no calls.

I attach an image of what my platform offers me. I can trade the futures of the indices or I can use options.

I'm talking just indices futures here. And even they can move independently, but in the period under observation where my net balance fluctuated they were not moving independently - I was watching the two charts on a tick by tick basis.

To return to David's comment:

Quote
You seem to be working on the assumption that all option prices move in lock step with each other ignoring different expiry dates.
When any two prices are moving in lock step (as I stated, this is a given in this particular example based on observation) - then a long position in one and a short position in the other should keep the net position unchanged during that period they are moving in lock step. Mine didn't. I'm seeking a possible cause other than a problem (sharp practice?) by the broker.
Attached Image
  • #6
  • Nov 15, 2012 7:41am Nov 15, 2012 7:41am
Quoting WideEyed
...
ah right. never mind then. i started to go down the rabbit hole there.

is the value continuing to drift, or is it just fluctuating... and are you sure it's not a result of the spread, or even swap charges (do futures even have swap charges)? it'll surely be something annoyingly obvious in the end.
Congratulations ScalaFX for coming out of the closet!
  • #7
  • Nov 15, 2012 8:31am Nov 15, 2012 8:31am
Over the last several hours the net position has been as expected - rock steady.

But it did fluctuate for a period of at least an hour. When it did fluctuate it always did so in the platform's favour i.e. higher net loss before eventually dropping down to where it should have been.

I did think you experts might suspect a change in spreads - and that's what I suspected originally especially as it was a volatile time for the index with some sharp 1M movements - but as I covered in my original post, the spreads hadn't changed.

I don't believe there are swaps applicable. I am aware of no other charges. In the absence of any solution to the mystery I'll have to fall back on ol' Sherlock Holmes: "when you have eliminated the impossible, whatever remains, however improbable, must be the truth"
  • #8
  • Nov 15, 2012 8:45am Nov 15, 2012 8:45am
Quoting WideEyed
Over the last several hours the net position has been as expected - rock steady.

But it did fluctuate for a period of at least an hour. When it did fluctuate it always did so in the platform's favour i.e. higher net loss before eventually dropping down to where it should have been.

I did think you experts might suspect a change in spreads - and that's what I suspected originally especially as it was a volatile time for the index with some sharp 1M movements - but as I covered in my original post, the spreads hadn't changed.

I don't believe...
i did notice you mentioned spreads before, but it was worth mentioning again in case you hadn't scrutinized it properly. it would probably be easier to just ask your broker what the story is, unless someone familiar with futures pipes-up in the meantime.
Congratulations ScalaFX for coming out of the closet!
  • #9
  • Last Post: Nov 16, 2012 4:57am Nov 16, 2012 4:57am
Thanks. After some further research, I've decided to leave this IG Index account aside for the moment and explore one or two other brokers.

I know you guys will probably laugh, but the spread I've been accepting from them on major currency pairs like EUR/USD and GBP/USD is 9.8 - 11.5 (with the exception of USD/CAN where I'm getting 8.5)

We live and learn. And I'm learning much from being on these boards
0 traders viewing now