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.

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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.

  • 2
    $\begingroup$ Option are traded according to demand and supply. Theoretical option price models assume certain distributions for the underlying market and then tell you what the fair price would be. But the market clearly does not believe in the BS model. It's known to be flawed and oversimplified. The market does not believe in any model. You'll never find a model that always agrees with market prices. Even if the market (i.e. all option traders) believed in the BS model, would they all agree on the same volatility? Probably not... Look for ''volatility surface'' to see how "wrong" the BS model is $\endgroup$ – KeSchn Apr 6 at 17:02
  • $\begingroup$ Thanks for that explanation! Do you know something about the ranges within which I can sell my options? I remember trying to sell an option where the ask price was at 0.16 and I put that I wanted 0.2 (just to try it out) and it returned an error saying it was outside of the allowed range. $\endgroup$ – Whazzup Apr 6 at 17:47

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