Mark Price

[vivaskyliska]

Hi Ladies and Gentlemen,


There is something about Mark Price that I totally don't understand the logic behind its application.
I believe Mark Price is widely used in TD Ameritrade (Thinkorswim), Interactive Brokers and many other trading platforms.

So, I understand that:
a) Unrealized P/L% = (Trade Price - Mark Price) x No. Of Contract
b) Mark Price = (bid price + ask price) / 2

My question:
Doesn't it make more sense if Unrealized P/L% = (Trade Price - Bid Price) x No. Of Contract, instead of a) ?
I am saying this because Bid Price is essentially the minimum (most conservative) price what we get when we close/exit a trade (say, a long call position), no?
Why would we want to refer to a somewhat artificial and baseless price (i.e Mark Price) to overestimate our Unrealized PL% ?

To put thing into context,
Say, i entered into a long call option position with the following details:
bid price = 0.10
ask price = 0.50
trade price = 0.10
no. of contract = 1

If the formula is Unrealized P/L% = (Trade Price - Mark Price) x No. Of Contract
Then, mark price = 0.3 and Unrealized PL% = 200%

Whereas,
if Unrealized P/L% = (Trade Price - Bid Price) x No. Of Contract
Then, Unrealized PL%= 0%

Thus, by referring to Mark Price as the price to close/exit a position, your estimated Unrealized PL% will always be upward overestimated which i don't understand the logic behind.

Appreciate if anyone here could shed some light.

 

[guru]

I don’t think that Mark price is used at IB and other brokers.
IB supports viewing Mid price and Last price, but they don’t need to be used for calculating, current value, total P&L or unrealized P&L on the position.
I believe that for calculating unrealized profit and current value on options they use/calculate theoretical value of those options. Sometimes the unrealized profit based on the Mid price can be negative but the unrealized profit shown by IB is positive (and vice-versa).

 

[vivaskyliska]

Snapshot A) below is (long call option) positions what i extracted from IB into my Excel spreadsheet. (Unfortunately, I have no access to my IB account now. I will try to snap it from IB platform later when i have the access)

Similarly, snapshot B) below is some of the (long call option) positions i hold in TOS.

Both show that:
Unrealized P/L = (Trade Price - Mark Price) x No. Of Contract

A)

B)

Thanks.

 

[guru]

Snapshot A) below is (long call option) positions what i extracted from IB into my Excel spreadsheet. (Unfortunately, I have no access to my IB account now. I will try to snap it from IB platform later when i have the access)

Similarly, snapshot B) below is some of the (long call option) positions i hold in TOS.

Both show that:
Unrealized P/L = (Trade Price - Mark Price) x No. Of Contract
Thanks.

You previously wrote that "Mark Price = (bid price + ask price) / 2", but your screenshot shows Bid=0.26 and Mark=0.26219. So how much is Ask in your example A? Can Ask Price be 0.26438?

Though many times Mark & Mid should be the same since theoretical price should be based on IV, while IV may be based on Mid or Last price, so they feed into each other (as I understand it).

Here is an example from my current account of a gold futures options position I used as a hedge. The Mark price is different from the Mid and different from the Last. And I don't look at the Mark price in IB too often, but this may be the theoretical price used for calculating P&L. Because in this example the cost is $207 and the Mark is -$66, which results in -$273 unrealized P&L.
But again, Mark is different from Mid. And IB shows Mark price separately from Mid, so they are not the same.

Can you see Mark and Mid separately in TDA? If not, then they may be the same in TDA.

 

[guru]

Here is another example that shows totally incorrect P&L, probably because the market is closed right now. I may check how it looks tomorrow. But you can see that Mark, Mid and Last are all totally different. (Mid doesn't even exist for this)

 

[ironchef]

Schwab uses the same "Mark Price" for unrealized gain/loss. However, on its mobile App platform, it uses bid for unrealized gain/loss. Don't know why.

 

[vivaskyliska]

You previously wrote that "Mark Price = (bid price + ask price) / 2", but your screenshot shows Bid=0.26 and Mark=0.26219. So how much is Ask in your example A? Can Ask Price be 0.26438?

Though many times Mark & Mid should be the same since theoretical price should be based on IV, while IV may be based on Mid or Last price, so they feed into each other (as I understand it).

Here is an example from my current account of a gold futures options position I used as a hedge. The Mark price is different from the Mid and different from the Last. And I don't look at the Mark price in IB too often, but this may be the theoretical price used for calculating P&L. Because in this example the cost is $207 and the Mark is -$66, which results in -$273 unrealized P&L.
But again, Mark is different from Mid. And IB shows Mark price separately from Mid, so they are not the same.
View attachment 212776

Can you see Mark and Mid separately in TDA? If not, then they may be the same in TDA.

I will snap and post the Ask price in IB when I have the access later.

I actually have called TOS technical support line and they confirmed that:
i) Mark Price = (Bid Price + Ask Price)/2

Whereas from your understanding:
ii)Mark Price = Theoretical Price (derived from IV in this case since it is an option position)

Your understanding seems to make more sense.
I will check further on this again.

But regardless the correct one is i) or ii), don't you think iii) should be the formula of how to calculate the Unrealized PL:
iii) Unrealized PL = (Trade Price - Bid Price) x No. Of Contract

Instead of what seems to be the formula used in both TOS and IB:
iv) Unrealized PL = (Trade Price - Mark Price) x No. Of Contract

My rationale is that Bid Price is potentially what market can offer you if you close the trade right now whereas Mark Price is just a estimated/artificial/theoretical price that you might be able to close your trade at.
In other word, Bid Price will always be the more conservative estimation of unrealized PL without giving any the false comfort.


Thanks.

 

[guru]

I will snap and post the Ask price in IB when I have the access later.

I actually have called TOS technical support line and they confirmed that:
i) Mark Price = (Bid Price + Ask Price)/2

Whereas from your understanding:
ii)Mark Price = Theoretical Price (derived from IV in this case since it is an option position)

Your understanding seems to make more sense.
I will check further on this again.

But regardless the correct one is i) or ii), don't you think iii) should be the formula of how to calculate the Unrealized PL:
iii) Unrealized PL = (Trade Price - Bid Price) x No. Of Contract

Instead of what seems to be the formula used in both TOS and IB:
iv) Unrealized PL = (Trade Price - Mark Price) x No. Of Contract

My rationale is that Bid Price is potentially what market can offer you if you close the trade right now whereas Mark Price is just a estimated/artificial/theoretical price that you might be able to close your trade at.
In other word, Bid Price will always be the more conservative estimation of unrealized PL without giving any the false comfort.

Thanks.

Not sure if my opinion matters, while the P&L calculation could have some traps that possibly some brokers discussed. For example some options do not have bid price or have super-wide bid/ask like $0.05/$5.00 with mid=$2.50 (just an extreme example). But then someone may post a bid of $2.00 and not get their order filled, so the new bid will be $2.00 (from previous $0.05). Should then the P&L of thousands of accounts be adjusted by such a big difference?
And what happens if someone has very little margin available, but their P&L jumps above and below margin limit every hour?
So generally I would be looking for some stability in calculating P&L and margin, not subject to manipulation by other traders.
Possibly this is what IB is trying to accomplish.
So you would need to be involved in discussions with internal teams at each broker to hear all arguments and make related decisions.

 

[vivaskyliska]

Yes, i thought so too especially with thinly traded options or options with wide bid-ask spread, it is good to have a reference price (Mark Price).

By the way, i called to check with IB.
Their Mark Price is:
The Ask Price if less than Last Price OR
The Bid Price if Bid Price is more than Last Price

I would think TOS's is similar too if not the same.

Thanks.

 

[tradegoodstocks]

Yes, i thought so too especially with thinly traded options or options with wide bid-ask spread, it is good to have a reference price (Mark Price).

By the way, i called to check with IB.
Their Mark Price is:
The Ask Price if less than Last Price OR
The Bid Price if Bid Price is more than Last Price

I would think TOS's is similar too if not the same.

Thanks.

That's what IB also says on their web site, but it is not what they show in TWS as Mark Price for options. Their mark price is different from the mid price (which they also display). Does anybody have more insight into what Mark Price is at IB for options?