Newbie Question: Market Price and Limit Price

[poppinoptions]

The individuals at Option House didn't really want to answer my question, therefore my quest has shifted over here for answers.

I was looking at SPY, and the option price was at .48 cents for a $121 strike. I switched the "Price type" to Market and the estimated cost of trade stated, "48.00 + Commission." After that, I switched the "Price type" to Limit and the estimated cost of trade stated the same thing, "48.00 + Commission."

I placed it at market price because the limit price was pending for way too long and got the following screen shot from the transaction.

I suspected that the market price of the stock option was .67 cents as indicated under fill price. Thus, losing 19 dollars on every single contract due to market value.

My question is, where is the market value indicated? I don't see it anywhere located on the option chain.

I know "Limit" places a defined value on your requested option price. The market value will fluctuate until it reaches that limit price, which in turn an option is bought/sold at that moment. (I hope I am saying this correct)

Can someone please help?

Thanks,

Peter

 

[poppinoptions]

Is there anyway to calculate the true market value manually?

 

[QuestOptions]

a limit order allows you to buy or sell at the price you want or better. If it never reaches your "limit" price you will not get filled.

A market order will fill you at whatever the bid price is (if you are selling) or whatever the ask price is (if you are buying)

The market price is reflected in the bid/ask spread.

I am not familiar with your trading platform. So I don't know for sure where that $0.48 cents came from. If I were to guess. I would say it could have been the last fill price or the theoretical option price.

Your trading platform probably has a feature in which you could display a theoretical option price. By using an option pricing model you can get an "estimate" on the value of the option. The forces of supply and demand will dictate what the option will be priced at.

You also have to be aware of news announcements. Before a news announcement it is common to see implied volatility spike and the bid/ask spread to widen as well as the bid/ask size drop. In these types of circumstances you have to be very careful with your order placement. Placing a market order under these conditions could really hurt you.

The bid/ask spread is a great indicator of market liquidity. I would also throw in bid/ask size in your platform display along with the theoretical option price.

A tight bid/ask spread allows to place market orders with confidence. The 121c is 57b/59a that is a tight bid/ask spread. Some markets are wider and market orders will not work so you have to stick with limit orders. A theoretical option price will help you in trying to figure out where to place your limit order if the option strike has a wide bid/ask spread (a common practice is to "middle it" which means to place your limit order in between the bid and the ask) The buyer and seller must agree on the price to get filled though.

Less obvious things to consider:

Check your internet speed and see if you are getting delayed feeds...even a second or two delayed could hurt you. Be careful with market orders if this is the case for you.

In your example you are showing an option that expires in 1 day. The price of the option moves very fast when there is little to no time till expiration. At expiration it's either going to finish in the money or expire worthless. You have to be careful with market orders when the option price moves so fast.

If you are long the option you will have negative "theta" (which moves very quickly the last few days/hours before expiration. If you are going to be trading options till expiration you should also through in "gamma" in your platform display.

I hope this helps.

 

[poppinoptions]

Thanks, that helped out alot!! I did some further research and found the following.

bid/ask prices are always posted with corresponding bid and ask sizes, which serve as measures of the strength and depth of the bid/ask prices. They tell us about the supply/demand pressures on a stock at a given moment. We can summarize important Bid/Ask size concerns as follows:

- A large bid size indicates a strong demand for the stock.
- A large ask size shows that there’s a large supply of the stock.
- If the bid size is significantly larger than the ask size, then the demand for the stock is larger than the supply of the stock; therefore, the stock price is likely to go up.
- If the ask size is significantly larger than the bid size, then the supply of the stock is larger than the demand for the stock; therefore, the stock price is likely to drop.

Because bid/ask prices and sizes change quickly in real-time, supply and demand also change quickly in real-time. Experienced traders always pay very close attention to the bid/ask sizes of a stock to monitor the supply-demand dynamic. Short-term traders usually buy a stock only when the demand is higher and sell a stock if demand suddenly becomes lower relative to supply.