Is it plausible for the bid / ask spread to move upward with zero volume and an option expiring worthless on the same day?
Is it plausible for the bid / ask spread to move upward with zero volume and an option expiring worthless on the same day?
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External question — Personal Finance Stack Exchange
Author: openwindows
Original post: https://money.stackexchange.com/questions/127012
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
I'm studying historical options quote data, experimenting with different trading strategies and here's an example of what information I have for every option, recorded hourly:
| [ 02-20-2004 16:00 ] UNH 2/21 40c on 02-20-2004 {
open: 0,
high: 0,
low: 0,
close: 0,
bid: 21,
ask: 21.1,
underlying: 'UNH',
strike: 40,
last_volume: 0,
bidsize: 50,
bid_date: '2004-02-20 16:00:00',
asksize: 30,
expiration_date: '2004-02-21',
option_type: 'call',
symbol_alt: 'UNH_2004-02-21_40_call'
}
To simulate the trader's disadvantage when buying / selling options I planned on calculating the
cost
(what we can buy it for) and
value
(what we can sell it for) as:
spread_size = ask - bid
spread_middle = (bid + ask) / 2
disadvantage = 0.15
cost = spread_middle + (disadvantage * spread_size)
value = spread_middle - (disadvantage * spread_size)
but what I did not expect was for the bid / ask to be nonsensical with zero volume OTM expiring options. Now I'm trying to understand if the data I have is flawed, or my understanding of how to estimate option value is flawed. Is it not true that as an option is nearing a worthless expiry, the bid / ask should reflect that?
Look at the data above. According to the data, on 2/20/2004 at 16:00 (
end of day on Friday
, so the moment of expiry for this option)
UNH 2/21 40c
had a bid / ask spread of 21 / 21.1 with a bid size of 50 and an ask size of 30 (amount the market maker is willing to buy / sell), and 0 volume. The strike is 40 and
UNH on that date was worth between 30 and 31
Should the bid / ask not be close to 0?
Can someone explain whether this is a plausible phenomenon, and if so, how I can use the information available to determine realistic
cost
and
value
estimates rather than using the formula above?
Or whether, rather the data seems wrong and I should contact my data supplier, who I paid 4 figures?
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Quoted from Forex.com.bd-Editorial External question — Personal Finance Stack Exchange Author: openwindows Source score (net votes, not local likes): 2 Original post: https://money.stackexchange.com/questions/127012 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I'm studying historical options quote data, experimenting with different trading strategies and here's an example of what information I have for every option, recorded hourly: | [ 02-20-2004 16:00 ] UNH 2/21 40c on 02-20-2004 { open: 0, high: 0, low: 0, close: 0, bid: 21, ask: 21.1, underlying: 'UNH', strike: 40, last_volume: 0, bidsize: 50, bid_date: '2004-02-20 16:00:00', asksize: 30, expiration_date: '2004-02-21', option_type: 'call', symbol_alt: 'UNH_2004-02-21_40_call' } To simulate the trader's disadvantage when buying / selling options I planned on calculating the cost (what we can buy it for) and value (what we can sell it for) as: spread_size = ask - bid spread_middle = (bid + ask) / 2 disadvantage = 0.15 cost = spread_middle + (disadvantage * spread_size) value = spread_middle - (disadvantage * spread_size) but what I did not expect was for the bid / ask to be nonsensical with zero volume OTM expiring options. Now I'm trying to understand if the data I have is flawed, or my understanding of how to estimate option value is flawed. Is it not true that as an option is nearing a worthless expiry, the bid / ask should reflect that? Look at the data above. According to the data, on 2/20/2004 at 16:00 ( end of day on Friday , so the moment of expiry for this option) UNH 2/21 40c had a bid / ask spread of 21 / 21.1 with a bid size of 50 and an ask size of 30 (amount the market maker is willing to buy / sell), and 0 volume. The strike is 40 and UNH on that date was worth between 30 and 31 Should the bid / ask not be close to 0? Can someone explain whether this is a plausible phenomenon, and if so, how I can use the information available to determine realistic cost and value estimates rather than using the formula above? Or whether, rather the data seems wrong and I should contact my data supplier, who I paid 4 figures?
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