How are stock options priced?
I have looked at call options prices for IMA after a recent dramatic stock price drop. Options prices appear to be still priced for the pre-drop stock price. I have noticed this on other stocks as well.
eckelg
Answers
2183 points
ChaosNantuko answered one year ago …
Stock options are generally priced based on a very complex mathematical model known as the "black-sholes" model. There are a number of variables that effect the price of the options in this model, including: time to expiration, implied volatility, intrinsic value (how far in the money the option is), RHO (sensitivity to a change in the risk-free interest rate), as well as a couple other factors. After a big drop, people tend to expect more volatility. If people are expecting more volatility, the implied volatility rises, which causes the options to rise in value slightly.
That being said I looked at the call options on IMA, and i wouldn't say they're priced as if the stock didn't drop. Remember that the options have time value, so the price of a stock option won't just be the stock price minus the strike price.
There is an article here that goes into more detail: http://www.investopedia.com/articles/optioninvestor/07/options_beat_market.asp
631 points
Creezy answered one year ago …
Be sure to focus on the bid & asking price and NOT the "last trade" because the last trade may have happened long ago (sometimes weeks).
The Bid and Ask are the real price.
204 points
helpme answered one year ago …
The Bid and Asked prices are real price, but who determines those prices? Some more actively traded options have a narrow spread between bid and asked prices. thinly traded options have a wide spread. So if wanting a thinly traded option, at what lowest price would one expect to execute the trade? Perhaps this is more of a question than answer.
Read more from helpme
314 points
Ifly answered one year ago …
In USA (as apposed to other countries) the market maker has the obligation to keep the market fluid and so he will always give you a Bid and Ask. He makes his money on the difference or the spread. The less volume traded the wider the spread. The bid and ask are usually either side of the theoretical price which is calculated as explained above. You do not have to accept the bid or ask. As a rule of thumb try dividing the spread by 3 and you take one third and give the market maker the other two thirds.
Cheers
Ifly
