The options volume rule exists to try and make options trading as realistic as possible. The basic idea is that we don't want to fill trades in our simulation that wouldn't be filled in real life because of volume.
For example, you might be able to buy 1000 contracts in a frequently traded company like Cisco or Microsoft. However, this same trade would be completely unrealistic in a smaller company that traded a few dozen contracts a day.
Even if there was another side to take the trade in real life (which is doubtful), the price would surely change because of the size of the trade. There is no way for us to determine what the end price would end up being, so we don't allow the trade to go through. In our volume rule, we first consider the total number of contracts tradable. This is calculated as the greater of:
Volume Today * Options Tradable or Ask/Bid Size
- "Volume Today" is the current number of contracts traded today
- "Options Tradable" is a variable defined by your administrator when the group was created. This represents the percentage of daily volume you can trade. By default, this is 25%.
- "Ask/Bid Size" is the number of contracts market makers have committed to trading at the ask/bid price. On the quote screen, this will be written as "5.00 [20]" where 5.00 would be the ask/bid price and 20 would be the size. Second, we have to take into account the number of contracts a user has already purchased today. Otherwise, you could beat the rule by making many small trades that would have the same effect on your portfolio as one big trade.
Total Contracts = Contracts Bought Today + Attempted Contract Size
This brings us to the final calculation:
If "Total Contracts" is less than or equal to "Contracts Tradable"
Then order is possible
Else
Order is not possible.
For example, say we have a situation as follows:
Volume Today = 50
Options Tradable = 25%
Ask/Bid Size = 20
Contracts Bought Today = 10
Attempted Contract Size = 50
Contracts Tradable = Greater of 12.5 and 20 = 20
(50 * 0.25 = 12.5)
Total Contracts = 10 + 50 = 60
60 is greater than 40, so the trade is denied.
Don't worry if this all sounds too complicated for you to figure out in your head. We'll always display the number of contracts you can trade. In the case above, it's 10 contracts. (Number of Contracts Tradable - Contracts Bought Today)