Penny Pricing in Options on the Horizon

10/02/2009 12:01 am EST

Focus: OPTIONS

Traders should know that the SEC approved NYSE Euronext’s option pricing proposal on September 16, 2009. For the past two years, the leading equity options exchanges have been trying to convince the SEC that a move towards trading equity options in penny increments versus the nickel and dime increments of the past is a poor idea.

The SEC must disagree as they recently approved the trading proposal of NYSE Euronext. NYSE Euronext’s plan calls for all equity, equity ETFs, and equity index options priced under $3 to be traded in penny increments. In August 2000, the SEC oversaw the equity markets shift from trading in fractions to decimals.

Regulatory changes usually cause a shift in the balance of power in the corresponding market. These changes are no different. Market makers will most likely be the most adversely affected as the decrease in the quoted spread will cut into their margins. Large institutions will complain that there will be less quoted size on the inside market. Individual investors should benefit from tighter markets. We believe that the groups that will benefit most from these changes are short-term equity traders.

Equity daytraders who are savvy enough to understand how to express their views via options will see their profitability skyrocket. It is time for traders to evolve with the market and reap the rewards!

By Larry Fisher, Founder of TradingRM.

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