I’m an options noob and after spending a few years investing in pretty general SP/sector ETFs and some big companies through TD and RH, I’ve started experimenting with a few hundred bucks of options contracts every few months to learn the space and see if I can get a hang of things generally. I’m only buying calls for things until I understand better. A question I have relates to the pricing of the call contracts. I purchased 5 YANG calls this morning (10/19, $12 at 60 cents). My experiment on this is of course to “bet the Chinese markets slide”.. whatever… it’s small, just a total guess. So I check today and my contract is down ~98%. Not confused about that, I probably made a bad bet or whatever. What I am confused on is the fact that contracts above and below my call price ($12, 10/19) are totally different prices and it seems only the $12 call is down. I guess I can’t include a screenshot but here is the chain I see:
YANG, 10/19 calls (current YANG: $8.28)
$14 – $0.85
$13 – $2.15 (+21%)
$12 – $0.60 (-98%) – I have 5 calls here at .60
$11 – $1.50 (+58%)
$10 – $1.30 (+23%)
Why would just the $12 be falling so much while price levels above and below that for the same expiration date are doing fine? Is it just a volume issue?
Again, total options noob, feel free to let it rip. Just seems illogical that calls to break even at $12 would be less desirable than $13 for months down the road with the underlying stock falling?
Understanding price differences on calls
byu/DeviantCarcosa inoptions
Posted by DeviantCarcosa
3 Comments
The 12 is the only one that has traded today, so the prices on the others are somewhat theoretical, based on bid & ask prices from some earlier date. Well, the 14 doesn’t even have a current bid, so it’s ‘price’ is just halfway from the ask to zero.
Wide bid/ask spread. No or tiny volume on most contracts, low option interest. No liquidity, or illiquid.
You’re looking at the ask…. The ask is not the “price” or “value” you can immediately sell and fill your calls back for. That would be the bid, and many of the calls on the chain have a bid of zero. Think on what that means for a second. You bought your calls at the ask, the market maker is not going to buy them back at the ask, doesn’t work that way.
I suggest paper trading options, or learn how the pricing on options work before you begin trading options with real money.
Welcome to options! I’d suggest glacing over our wiki for learning resources. We have some Getting Started guides you might find helpful.
We generally recommend that people start with paper trading before diving into real money, so you can learn at no risk. Schwab/tos has a great paper trading platform.
> I purchased 5 YANG calls this morning (10/19, $12 at 60 cents). My experiment on this is of course to “bet the Chinese markets slide”..
Using an expiration less than 60 days is recommended. Going further out than 60 days increases the cost of the contract for buyers and decreases the rate of theta decay for sellers, so they tend to be less cost efficient. There are some circumstances where far dates are justified, but I don’t hear those circumstances in your scenario.
> YANG, 10/19 calls (current YANG: $8.28) $14 – $0.85 $13 – $2.15 (+21%) $12 – $0.60 (-98%) – I have 5 calls here at .60 $11 – $1.50 (+58%) $10 – $1.30 (+23%)
You can post a screenshot by using an image sharing site, like imgur or tinypic. But what you wrote is more than enough to sort this out.
This looks like a Robinhood option chain, am I right? Robinhood is notorious for posting a “price” for a contract that is not accurate, because they hide the bid/ask spread from you. You have to drill down to see the more accurate bid/ask.
In general, consider the entire bid/ask spread for contracts, instead of any one price. No one price can accurately capture the market price for a contract. The wider the bid/ask spread, the less accurate RH’s quoted price is going to be.
I don’t know the actual quotes for that chain and they have probably changed by now, but here’s a possible explanation. Let’s just compare the 13 strike to the 12 strike by bid/ask.
12 call “price” $0.60 for a bid/ask of $0.55/$0.65, so the mid-point is $0.60.
13 call “price” $2.15 for a bid/ask of $0.50/$3.80, so the mid-point is $2.15.
If you compare the mid-point prices, the 13 call looks higher, **but if you compare the bids**, the 13 call looks lower, as expected.