Ken Trester

The Price of Options Trading Success

by Ken Trester   07/16/08

If you went to three different grocery stores, you'd probably see three different prices for a simple gallon of milk. No doubt you'd give your business to the store that charges the least for this product. And thanks to the fact that there are multiple stock and options exchanges, the same kind of "shopping around" happens every day on the open markets.

If you look at any major financial information site for any stock, you'll find the price at which the security most recently traded. You'll also find the "bid" and "ask" prices at which buyers and sellers have declared the price they wish to pay (or collect for) a position.

Options investors must be especially mindful of what each price means when reviewing options premiums. There's a reason why each price is listed, and knowing what they represent can help you to make better trades.

The current price shown is the price of the most recent trade that was completed for the stock or option. This is the market value of the security. This may seem straightforward enough, but it's important to remember that it's not necessarily the price you would pay or receive for an option if you placed an order at that exact moment.

The price of the most recent trade can be deceiving, for two reasons. One, depending on the Web site where you are visiting to find options trading quotes, the figure can be delayed by 15 to 20 minutes and, therefore, doesn't accurately reflect what might be happening at that very moment. Secondly, the price itself can be sort of a misnomer, as the most recent trade that took place could have been 15 minutes or even 15 DAYS earlier!

If a stock or option isn't liquid -- that is, if there aren't a lot of shares or contracts available for trading and/or not too many people are interested in trading them -- then a security's price can remain unchanged for several months due to inactivity.

To determine the price you would pay or receive if you submitted your order immediately, you need to look at the "bid" and "ask" prices, which are never the same but do share a common purpose in giving you an accurate trading range for the option you may be interested in buying (or selling). The difference between the prices is called the "spread" and the smaller that spread, the more-liquid the option is.

The asking price, sometimes called the "offer price," is the lowest price at which a market-maker (or, someone who owns the option) is prepared to sell the option at any given time. As an options buyer, you are looking for the best "ask," or the lowest price for which you can buy an option.