How Option Quotes, Model Values, and Order Limits Differ in Trading
Summary
The document describes a novice trader’s difficulty reconciling a displayed option value with executable market prices. It raises questions about why a theoretical value from models such as Black–Scholes may not fill a limit order, how bid and ask quotes affect buying and selling, and whether a broker restricts order prices to a permitted range.
The text itself is a question and provides no answers or supporting analysis. It nevertheless surfaces practical distinctions between a model estimate and available market quotes, especially when liquidity is low and spreads are wide. It also notes that a broker may reject an order priced far from its allowed range, but does not establish how that range is determined or whether it tracks a model value. The document is therefore useful as a set of execution and valuation questions, rather than as a complete explanation or trading method.
Key ideas
- A theoretical option value from a pricing model does not ensure an order will execute at that price.
- Bid and ask quotes determine the prices currently available to sellers and buyers.
- Low trading activity may make the displayed market harder to interpret or trade against.
- Broker order-price limits can restrict submitted orders, but the document does not explain how those limits are set.
Tags
Full text
# Trading options - real life vs. textbook? # Trading options - real life vs. textbook? I'm a Management with Finance student and we have recently learned about options. Because I find it easier to learn these things when I have some context to apply them to, I put $100 in my brokerage account and started trading some options that I thought had potential. What I got really confused with was the bid/ask prices and the option price. I always assumed that options were traded at one price: the price derived from the stock's time series using Binomial/Trinomial option pricing models or the Black-Scholes equation. This exact price is also given on the overview of the option as the option's price, as shown in the picture. However, when I wanted to buy/sell options at that price, I found out that it was pretty difficult. My buy order (at the given Black-Scholes market price) was not filled even hours after I submitted it so I figured that it was because of the bid/ask spread. The $100 were not essential for me so I upped my buy limit to almost the ask price and it was fulfilled within an instant. Fortunately (the stock markets had a good day today) the price of Lufthansa went up and the ask price for which I bought the options became the exact same as the Black-Scholes derived option price. So I figured I would try to sell them; however, the bid/ask prices had remained the same so nobody wanted to buy my options at their new, actual Black-Scholes value. What is the rationale behind the option price (as given in the picture) then? If the free market decides on what I get for an option then the option price is completely needless. Furthermore, assume that I would like to buy an option where there is extremely low trading volume and there simply is not bid/ask spread, but only the Black-Scholes price as in the picture. Could I buy at that price then?! Secondly, as nobody would buy them, I figured that I would keep the option and hope for LHA's price to increase. However, I thought that it would be best if I would submit a sell order for an unlimited period of time at double the price that I bought them for, thinking that if the price went up while I was not trading then I would definitely sell if I could double my money. When submitting, however, my broker (DEGIRO) returned an error message saying that double the price was outside of the possible range that I could ask for. I didn't get that either. What range? Where can I find out what this range is? Is this range correlated with the actual Black-Scholes option price? I'm confused but would appreciate some guidance very much.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.