What Is the Reason For Wide Spread Options?

[JesseJamesFinn]

Hi, I am wondering why some stock-options have the following Markets?


Bid $1.00 Ask $6.00


Bid $1.80 Ask $9.00



Is this based on non-liquid nature of a stock, super low float and low volume like my KS(My KS did a 2 for 1 Split, I wrote about the problems I had with my Feb $45 Calls). Why is this Market posted when it's horrible and if you throw a Market-Order like some people will do, will a Broker like IB or Light-Speed fill at the Ask and burn the trader or will they find a way to get you a correct price? I never have bought a stock with wild spreads (Post Cereals POST, LABL, KS, LNG) and do not know how a Market Order with a giant spread would fill. Has anyone made this error by accident or know of anyone getting screwed by bad Option Fills?

 

[justrading]

Have you tried putting in a limit order at what you think is a fair price?

With options I usually trade spreads, but I do recall one time wanting to close a position and the quotes were quite ridiculous, with my DITM leg being grossly undervalued.

I put in a limit order at what I thought was fair value and got the trade at 0.02 better. I have no idea how that could happen, but it did.

And with FX options quoted in increments of 5, I have put in limit orders and got better fills between increments.

 

[nazzdack]

Quote from JesseJamesFinn:
----why some stock-options have the following Markets?
----Bid $1.00 / Ask $6.00
----Bid $1.80 / Ask $9.00
----non-liquid nature of a stock....
----super low float....
----low volume....
----wild spreads....

1) Is it simply "stale" quotes?
2) Are those stocks (HTB) hard-to-borrow?
3) Are there weird "corporate governance" issues going on?
4) Is there a "large" cash dividend and/or stock dividend pending?
5) Illiquidity of the underlying shares could explain part of the wide bid-ask.
6) Are those ticker symbols you mentioned not included in a major stock index?
7) Avoid those tickers at all costs.....unless you know "something" that the rest of us don't.

 

[JesseJamesFinn]

"JustTrading", thank's for replying along with Naz on this topic. I do put in what I consider fair after using some of the Broker's pricing models using the Black-Shoal's and Binomial pricing models. Cool you got the extra .02, your Broker must have wanted your fairly priced option. I find this process of learning about Options and how they are priced puzzling on certain issues. I had some Puts on a few stocks hitting perpetual 52 Week Lows, imagine my surprise when I go to sell the contracts of the $3.00 Puts and the stock is trading at $2.30 a share.

January $3.00 Puts

Bid $.55 x $1.00 Ask Size 25x25


I offer my shares at $.70 and my order sits half the day and the stock creeps down to $2.13 and nobody hit's my order even when it's $.20 in the money, no fill on this stock! I cancel my order and the new option Market is:

At 15:25 PM the stock's price is $2.07


$.65 x $1.10 Size 25x25



"Naz"

"1) Is it simply "stale" quotes?
2) Are those stocks (HTB) hard-to-borrow?
3) Are there weird "corporate governance" issues going on?
4) Is there a "large" cash dividend and/or stock dividend pending?
5) Illiquidity of the underlying shares could explain part of the wide bid-ask.
6) Are those ticker symbols you mentioned not included in a major stock index?
7) Avoid those tickers at all costs.....unless you know "something" that the rest of us don't. "



I get attracted to these stocks because it seems like a neglected area, small stocks hitting new lows and it's a cheap way to Short stocks that chronically disappoint the Retail Clothing sector. I had some Puts on WTSL, CWTR, American Appareal, and Calls on Pac-Sun and their pricing get's very strange.


On another thread I was advised to go ahead and "put the stock" to the Market Makers and I have done that in the past when the small retailer went broke and headed on down to the Pink Sheet Market. I bought the Puts from somebody like myself who was stuck holding those Puts and maybe he got desparate because I came in and offered $0.10 above the Market Makers and he hit my order of 90 contracts and another 60 contracts sat on the LL2 and I bought them. The stock fell from $2.50 to $.23 after news of BK, finally using a GTC order I finally got intrinsic-value after letting the order sit their for a few days, the MMs were picking off 5 contracts slowly, costing me more commissions. We use to do that to Spoof-Orders when I was Day-Trading at a firm, I would throw out 13-shares of stock to a fake bidder and burn him when commissions were $29.99 back in 1989 It taught them to stop throwing out Spoof Orders.



I reviewed each point and thank you for taking the time to provide more insights on this topic. I am trying to stick with Options because the Market is acting so weird. Thank's again my friend, great website we got here to use! You are all awesome!