Ken Trester

The Price of Options Trading Success

by Ken Trester   07/16/08

Still, sometimes options traders will find that the bid and ask fields show zeros for all of the available strike prices of a particular underlying stock or index. Why is that? Again, we can turn to the market-makers to solve the mystery.

The market-makers will often remove the previous day's prices to wipe the slate clean before the opening bell, especially if the pricing hits psychological price points -- but not always.

Occasionally, options chains will show yesterday's bid and ask prices before the open. So, a market order entered based on these prices could be filled at a much-different price if the stock or index opens higher or lower. So, you must stay aware of price changes so that you don't get into an option trade for far more than you planned to pay -- likewise, you don't want to accept significantly less than you think the option is worth, if you're a seller.

No doubt that if you've followed a favorite stock and its corresponding options, you know that investors tend to follow like lemmings -- if the price goes up with volume (or increased buying), then they buy. If the price drops, they head for the exits in droves. Basing your buy or sell decisions on what everyone else is doing can be a very costly way to decide when to take your profits.

Sometimes, though, this overreaction can create opportunities for investors who are willing to run against the pack -- such as, buying a stock when it has been temporarily depressed or selling when a stock's price has been elevated for no apparent reason.

For this reason, some traders attempt to watch bid and ask prices to time their selling, but because prices move constantly (especially for actively traded positions) and also given the quote delays, you can't know what price you will get if you are a buyer or a seller unless you use specific limit orders (that is, you set the highest level you want to pay to buy or the lowest amount of money you're willing to accept to sell).

This underscores the importance of following a trusted expert in the field, instead of the crowd, who has insight and data that generate proper buy and sell signals, along with market/limit order perimeters.

Each option chart may show several different prices, but the most important one is the price that offers you the best return for your money.

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If you enjoyed this article, check out Ken Trester's "Take Options Losses in Stride" and "Trade Options with 'Fun' Money."