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Best Practices

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Price Discovery

Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Especially in illiquid underlyings, the process of price discovery is of great importance. For every quote, there is a bid price and an ask price. The bid is the price that the market is looking to buy, and the ask is the price that the market is looking to sell.

If the market is highly liquid say 1 to 2 pennies wide, we don't need to worry about price discovery as the market has already done this for us. If however, the market is 10 cent or more, then we will implement a mechanical price discovery process.

Initially, if we are looking to sell we will make an offer close to the ask price. If we do not get filled we will work our way down to the mid price. This is the price that literally middles the bid and the ask.

We will continue this process until we get filled at the best price possible. If you are looking to up your mechanical game, check out today's episode!

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