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Question By Roman
"Why Don't Options Have To Be Traded To Move?"
Why does options do not need to be traded for their value to change?
Asked on 24 Feb 2014
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Answered by Mr. OppiE
Hi Roman,
In stock trading, stock prices only change when the stocks are being traded. If nobody trades a certain stock, its price remains stagnant and doesn't change. However, this is not the case for options or futures (or any derivatives for that matter). Options prices can and do change without the need for the options to be traded at all. How is this so?
A car engine requires fuel to run but the wheels that it powers need not any fuel of their own to spin as long as they are attached to the engine, right? This is because the wheels DERIVE their spinning power from its underlying engine. This is the same thing with options. Options are not contracts that exist on their own in a vaccum. They are trading instruments created (or Written) to facilitate the trading of the value of the underlying stock. As such, they are known as "Derivatives" and DERIVE their value primarily from the stock they are created for. As long as the price of the stock moves, the price of the option will and must move even if the option is not traded at all.
Example of Options Price Change Without Being Traded
QQQ is currently trading at $89.81 and its April $90 Call Options are trading at $1.82.
If QQQ moves to $95 by expiration, the price of its April $90 Call Options will move to $95 - $90 = $5 (up from $1.82) even if it is not traded because the option derives its value from its underlying stock. Since the strike price of $90 allows its holder to buy QQQ at $90 when QQQ is $95, it has a value of $5, known as intrinsic value. This value accrues in the option whether or not it is being traded.
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To make things more complicated, options prices not only change due to changes in the price of the underlying stock. Options prices actually move based on five main criterias known as "Options Greeks" contained in a mathematical formula known as the "Black-Scholes Model" (of course this is not the only options pricing model available right now but the most common and most basic). All of the factors contained in the Black-Scholes Model can change an options price even if the option never gets traded. In fact, it can change an option's price even if the price of the underlying stock never changes.
In conclusion, options prices can change despite not being traded due to the fact that they are derivative instruments that derive their value not from being traded, but primarily from the price of their underlying asset. Due to factors contained in the Black-Scholes Model, options prices can change even if the price of the underlying stock never changes as well, hence an option's price is very dynamic and changes all the time whether or not it is traded and whether or not the price of the underlying stock changes.
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