Bid and Ask price?

[Nater]

How close to he bid or ask price do you get when you buy or sell an option? If the bid and ask quote is 0.50 and 0.52, and you try to buy a contract, and assuming nothing changes between the time you read the quote and the order is placed, are you going to get the contract for 0.52? Or is there a better chance that you're going to be paying more than 0.52?

Also, is there a good formula or rule to judge the spread? Whether it be formal or informal?

 

[diaoptions]

Quote from Nater:

How close to he bid or ask price do you get when you buy or sell an option? If the bid and ask quote is 0.50 and 0.52, and you try to buy a contract, and assuming nothing changes between the time you read the quote and the order is placed, are you going to get the contract for 0.52? Or is there a better chance that you're going to be paying more than 0.52?

Also, is there a good formula or rule to judge the spread? Whether it be formal or informal?

With the QQQ's you will get filled at $0.52, if you try and save a penny and place a limit order at $0.51 the order will sit there.

 

[danshirley]

Copied from my conservative options trades thread:

MMM: Update

This morning I submitted the Oct 70/65 bull put spread to be sold for a limit price of .40. The bid ask on the spread at the time was, and is now, .35/.45

Thus I submitted halfway between bid and ask. It filled at 3:57 PM. (i.e. just at the close) after sitting all day.

OptionsXpress lists the prob that MMM is above the spread on expiration at 95.76%, the prob that MMM is below the spread at 1% and thus the prob that MMM will be within the spread is 100- (95.76 +1)= 3.24%

Thus my estimate of the expected P/L on the trade = .9576(40) - .01(460) - .0324(230) = 38.3 - 4.6 - 7.45 = 26.25

Expected Yield = 26.25/460 = 5.7% in 133 days or 15.7% annualized.

OptionsXpress uses a separate method for filling spreads over and above each individual arm:

https://onlineint.optionsxpress.com...s/xspreads.aspx

The use of expected values in trading options is treated to some extent in all books on options (e.g. McMillian) also :

http://www.amazon.com/Mathematics-O...l/dp/0071445285

http://en.wikipedia.org/wiki/Expected_value