Factors for Estimating Option Spread Execution Slippage

Summary

The document frames a modeling problem: estimate before trading how much price concession may be needed to execute a multi-leg option spread, such as a vertical or butterfly. It proposes candidate inputs, including each leg’s bid–ask width across the national best prices and at individual exchanges, spread Greeks, changes in the underlying and implied volatility, and strike-level volume and open interest. These features point to both market conditions and the spread’s exposure to changing prices and volatility.

The document is a question rather than a proposed model or an empirical study. It supplies no execution data, target definition, estimation method, validation approach, or evidence that the listed variables predict fill quality. A practical model would need a clearly defined slippage measure and representative order and fill observations; its usefulness would depend on venue, order handling, market conditions, and spread structure. The note therefore serves mainly as a starting feature checklist for research into options execution costs.

Key ideas

• Pre-trade slippage estimates for option spreads could support order pricing and execution decisions.
• Leg-level bid–ask spreads across exchanges are proposed as candidate predictors.
• Spread Greeks and changes in the underlying or volatility may capture exposure to market movement.
• Strike-level volume and open interest are suggested as measures of available option activity.
• The document poses the modeling question but provides no fitted model or performance evidence.

Tags

# Pre-Trade Slippage Costs For Option Spread Execution


# Pre-Trade Slippage Costs For Option Spread Execution












Is there a quant model that can help estimate how much slippage one would have to give up in order to get an "option spread" (vertical, butterflies, etc.) order executed?

What factors should one look at in building such a model? For instance, some factors that would impact whether a "butterfly spread" would get executed may include:

- NBBO bid / ask spread of individual legs across exchanges

- bid / ask spread of individual legs (all legs at given exchange (ISE, CBOE))

- greeks of options spread (delta, gamma, theta, vega)

- percent change in underlying instrument

- percent change in volatility

- volume / open interest at strikes

What other factors would one look at? How would one build a quant. model to estimate pre-trade slippage costs for option spreads?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.