"Avoid Buying Options With Low Open Interest?"

"What Is The Market Price Of Options?"

"The market price for shares is very obvious as it is its LAST traded price, which is the Last Price. But I see that the last price can be very different from bid ask price in options trading, sometimes as much as 100% higher or 50% lower. How do we determine what the market price of options are?"
- Asked By Eugene on 26 Sep 2012

Answered by Mr. OppiE

Hi Eugene,

Indeed, determination of market price for shares is really pretty clear cut and is most often taken to be the Last price since stock prices only change when those stocks are actually traded. However, this becomes slightly more complicated in options trading due to the fact that options are derivatives that primarily derive their value from the price of the underlying stock. This means that the price of a derivative such as options, can change WITHOUT the option being traded at all as long as the price of their underlying stock changes (this is governed by the options greek "Delta"). This means that the price at which an option was last traded, which could sometimes even be a few days ago for thinly traded options, can be drastically different from its bid ask price if the price of the underlying stock has moved strongly.

The options chain for NAV today (26 Sep) for its Jan13 $20 Calls quotes a Last price of $6.81 with a Bid of $3.50 and a Ask of $4.10 with an open interest of only 105. The % difference between the last price and the ask price is a whooping 66%. So which of these is the "market price" at which you can trade this particular option?

The Last price for this option is $6.81 because it was last traded last week when the price of NAV was around $26. However, the price of NAV has dropped over the week and is now around $21.50, depressing the price of its Jan20Call to an Ask price of $4.10 today. That is the reason behind the big difference between its Last price and Ask price. This is why the Last price of options cannot be taken to be the market price in options trading. The price of the Jan20Call has dropped along with the price of NAV shares even without being traded.

The real market price, the price at which you can buy or sell an option right now, is actually the bid and ask price. The market price for an option if you are buying it is the Ask price while the market price for an option if you are selling it is the Bid price. In options trading, prices are actually quoted not by another options trader from the public but by professionals known as "Market Makers". Market makers are charged with the responsibility of quoting prices for every option to ensure liquidity for every options contract. The Bid price is the price which Market Makers (MM) have committed to buying an option from you and the Ask price is the price which MMs have committed to selling an option to you. The bid and ask price are therefore the most updated current price you can buy and sell a particular options contract at and are therefore the "Market Price".


In conclusion, the Last price of an option is a pretty insignificant piece of information as the price at which an option was last traded has almost no bearings on the price you can buy and sell an option right now. The market price, which is the price you can buy and sell an option right away, are the bid and ask price.