Option-Price Data and the “Last” Price

Ask any stock trader or investor where a particular stock is trading and you will likely be told a simple one-price answer. Where is IBM trading? $145 a share. Pretty quantifiable and pretty cut and dried. This generally-referenced price is called the “last” price, as it's the last price at which the stock traded.

With stock data, last price is an important figure – it's essentially the most recent market value of that stock.  With options, price data is very important as well for those gathering stock option trading information. But ironically, the last price is usually one of the least important bits of option-price information.

Options are not as liquid as stocks. There are periods of time – sometimes days, sometimes weeks – when an option will go without trading at all.  As a result, its “last” price may be considerably out of date. Is a month-old last price at which an option traded really the best representation of the option's value? Typically not.

To understand where the market is valuing an option, one should look at the bid and ask prices. Intuitively, the market values an option at more than its bid price. Why? The bid is where the market (collectively) is willing to sell. Therefore, the option must be worth more than the bid. Likewise, the option's value must be lower than the ask—where the market is willing to buy.

When reviewing an option chain in your OptionsHouse platform, it is easy to access the bid and ask prices in basic or pro mode. This pair of prices offers a more realistic picture of an option's pricing at any given moment.  Note that OptionsHouse users can choose what columns are displayed by following these instructions.

It's common for stock traders to look at historical stock prices, usually in the form of a stock chart. Not so with options. The reason, in part, is because of the irrelevance of an option's last price. In fact, a look at historical option prices reveals how easy this stock option trading information can make for a convoluted if not unrealistic view of the past.

Example:

1. An option is bid at $1.80 and asked at $1.90.
2. A trader sells one contract at the bid, putting the “last” print at $1.80.
3. A short time later, another trader buys one contract at the ask, putting the “last” print at $1.90.

These two one-contract trades are inconsequential to the option's actual worth. But it appears (by looking at the two consecutive last-traded prices) that the option's value rose 5.5% — from $1.80 to $1.90.

That looks like a big one-day move! But in fact, the option's value hasn't fundamentally changed.  Keep this inconsistency in mind when looking at option prices.

Photo Credit: msmccomb

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