I started trading option spreads in SMH, which trade in pennies, and my initial opinion is that it is great for off-floor traders. In some equity options, I used to wait days on my limit because I didn't want to give up a whole nickel. Trading SMH, this is now unnecessary. Penny increments let me gradually give up two cents to get done. This is a huge savings.

For example, trading a 20-lot spread, my commissions are $40, but if I have to give up a nickel on a spread, it costs me an extra $100. If I give up only two cents, I save $60! Obviously, I also save money when I trade out of the position. My commissions are already as cheap as I could hope for, so narrowing the spread is far more beneficial than any further commission reduction. I'm inclined to increase my trading size.





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1 Comment so far

  1. JB on February 28, 2007 10:27 pm

    I hope all options go into the penny increment format as it really does make option trading much more efficient.


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