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In the option table for SPY there is a column called 'Price' and a column called 'Bid' and a column called 'Ask'.

If I wish to buy a call option, I need to pay a premium. Which column is the premium I would pay? Is it the 'Price'? But isn't the 'Price' supposed to be mid-way between the 'Bid' and 'Ask'? Why wouldn't it be?

Chris W. Rea
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Victor123
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  • It is not a duplicate, kindly consider. If the last traded price is between the bid and ask, I understand., But in the example I quoted,the price is outside the bid-ask range. How can this happen? – Victor123 Jan 23 '14 at 14:48
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    Not different. Last trade price is a transaction that happened -- a record of the most recent occurrence of somebody paying the ask or accepting the bid. Bids & asks quoted now are potential prospective prices and fluctuate with the market. Since the "price" (last traded) only changes when there's a transaction, but bids & asks change without, they will deviate -- especially for thinly traded instruments, and an option at a specific strike & expiry is often thinly traded. Moves in the underlying change the option's bids & asks, but it takes a transaction to change the price! – Chris W. Rea Jan 23 '14 at 16:20
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    To answer the "which column would I pay" part: If you want to buy, and you use a market order, then you'll pay the ask (what it is at the precise time your order gets filled, not necessarily what you saw on your screen). If you enter a lower price, including whatever was coincidentally in the "price" column, then you're creating a new bid, and with a bid, you might not get filled. Read the linked-to question above for more. – Chris W. Rea Jan 23 '14 at 16:55

1 Answers1

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Options are illiquid much like a nanocap equity.

There can be long stretches of time before such securities are traded, but all during that time, market-making algorithms are there with bids and asks waiting to be filled.

The difference between an option and an illiquid equity is that the price of the option derives mostly from the underlying equity, so if no option trades have taken place, yet the underlying has moved considerably, the option limits generally follow, with a strangely deviant last price.

Limits for illiquid equities don't tend to move much without a trade because without new information, the cost to hold a position is mostly the interest rate.

Chris W. Rea
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  • I'll add that options don't have a monopoly on deriving value from an underlying. Equities can, too. This "phenomenon" (and I hesitate to call it that, because it's really unremarkable common sense once one understands) also occurs frequently with thinly traded ETFs, closed-end funds, the smaller-volume listing of a dual-listed (e.g. USD/CAD) or dual-class share (e.g. voting/non-voting), ADRs, convertible preferred shares, structured products (e.g. split share corporations), etc. – Chris W. Rea Jan 23 '14 at 16:41