The Trading Rules For Option Market Quotes

When a person contemplates an extensive trip, one of the first things taken into account is the expense involved. In planning our excursion into the realms of option market quotes we must, therefore, carefully weigh the expenses, or fixed charges of option market quotes.

Were there no expenses, making a profit from option market quotes would be far easier - profits would merely have to exceed losses. Whether you are a member of the New York Option Exchange or not, in actual trading - profits must exceed losses and expenses. These are incurred in every instance of option market quotes, whether it shows a gain or a loss.
They consist of:

• Commissions
• 'Invisible eighth’ (i.e. the difference between bid and asked price of the option market quotes, assuming that you buy and sell at the market price)
• Income Tax on sale
• Exchange fees

In addition… interest if the option market quotes are carried over night. By purchasing a New York Option Exchange seat, the commission can be reduced to $1 per hundred shares, if bought and sold the same day, or $3.12 if carried over night. This advantage is partly offset by interest on the cost of the seat, dues, assessments, etc.

The "invisible eighth" is a factor that no one - not even a member - can overcome. The bid and asked price of the option market quotes are never less than an eighth apart. If the market is 45¼ to 3/8 when you buy, you will as a rule, pay 45 3/8. Were you to sell it would be at 45 ¼. This hypothetical difference follows you all through the trade and has been designated by the writer as the "invisible eighth".

The tape reader who is a non-member of the exchange must, therefore, realize that the instant he gives an order to go long or short 100 shares, he has lost an eighth of a point. In order that he may not fool himself, he should add his commissions to his purchase price of the option market quotes, or deduct them from his selling price of the option market quotes immediately.

People who boast of their profits from option market quotes usually forget to deduct expenses. Yet it is this insidious item that frequently throws the net result over to the debit side. The expression is frequently heard, "I got out even, except for the commissions," the speaker evidently scorning such a trifling consideration. This sort of self- deception is ruinous, as will be seen by computing the fixed charges on a trade of 100 shares.

Bear in mind that a loss of the commission on the first trade leaves double that amount-to be made on the second trade before a dollar of profit is secured. It therefore appears that the tape reader's problem is not only to eliminate losses, but to cover his expenses from option market quotes as quickly as possible. If he has a couple of points profit in a long trade, there is no reason why he should let the option market quotes run back below his net buying price.