Financial Educational Resource Hub
Nsdaq VIPP
Whether you’re just starting out or looking to brush up on your investing skills, we’ll help you make smarter decisions about saving, investing and protecting your money.
Options Spreads Explained
Options prices driven by option Greeks
Black-Scholes was revolutionary in helping to price options. It quantified how things like time until expiry, moneyness (how far the strike is from the underlying price) and volatility all work together to determine the fair price of an option.
In the options markets, we see how that works by looking at real prices. As Chart 1 shows, options that are more in the money (delta) have higher prices. In addition, options with more time to expiry have higher prices.
Chart 1
Options prices are largely determined by the option’s moneyness and time to expiry
That should all make sense — an option with more delta (moneyness) is more likely to be exercised. In addition, the longer we have until expiry, the higher the chances that prices change which could put the option “in the money.”
However, this “non-linear” nature of option prices makes it even harder to compare spread costs across the same option underlying.
Chart 2
Options relative spreads are higher for less expensive strikes and lower for more expensive ones
Spreads in cents
When looking at spread in dollar terms, however, we see almost the opposite pattern. The strikes that were relatively wide (in percent) are actually smaller (in dollars).
Chart 3
Options spreads in dollar terms follow the same trends as their prices do
What does this mean?
It’s interesting to see how the leverage of options, caused by their different strikes (moneyness) and time to expiry, changes the spreads (in percentage and cents).
As we’ve discussed in the past, spread costs can be important to understand stocks trading costs. However, with stocks, the cost of trading each ticker is fairly constant over time. What we see here is that, because of the multi-dimensional pricing of options (shown in Chart 1, where tick constraints combine with moneyness and time to expiry), it makes comparing spread costs on one options trade difficult to compare to another trade in an option, even in the same underlying stock. That makes Transaction Cost Analysis for options much more difficult (some might say impossible).
-
Real-time
| Prev.Close | - |
| Open | - |
| Last | - |
| Change | - |
| Change (%) | - |
| High | - |
| Low | - |
| Volume (10Bil.) | - |
| Amount (100Mil.) | - |
NASDAQ VIPP
2024-09-30
| DATA | afternoon | |
|---|---|---|
| Top | Bottom | |
| - | - | |
Historical Stock Prices
| Date | Afternoon Top | Afternoon Bottom |
|---|
