Costs of Executing Complex Options Trades

61 Pages Posted: 21 Mar 2023 Last revised: 27 Sep 2023

See all articles by Su Li

Su Li

U.S. Securities and Exchange Commission

David K. Musto

University of Pennsylvania - Finance Department

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: March 3, 2023

Abstract

Execution protocols for complex options orders allow market participants to execute multi-leg trades such as verticals, calendars, straddles, strangles, and others as a single trade at a net price. The costs to execute complex orders are significantly lower than the costs of simple orders. Part of the difference is explained by different characteristics of the options traded, but a large difference remains even after controlling for factors that affect trading costs. These results are consistent with the hypothesis that the differences in the ways the complex and simple orders are executed contribute to the differences in trading costs.

Keywords: options trading, complex trade protocols, complex limit order book, complex price improvement auction, transactions costs, effective spread

JEL Classification: G13, G23, G24

Suggested Citation

Li, Su and Musto, David K. and Pearson, Neil D., Costs of Executing Complex Options Trades (March 3, 2023). The Wharton School Research Paper, Available at SSRN: https://ssrn.com/abstract=4389665 or http://dx.doi.org/10.2139/ssrn.4389665

Su Li

U.S. Securities and Exchange Commission ( email )

100 F Street NE
Washington, DC 20549
United States

David K. Musto

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Neil D. Pearson (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

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