(Q)
Good day.
If one buys a call you normally look at the „bid“ price to see what the current price is. To sell a call one would look at the „ask“ price in a similar fashion.
Do you guys have a way to calculate a good price using these „bid“ and „ask“ numbers to price spreads [ratio backspreads or others where you have both a buy and sell placing the trade and another buy and sell getting out] ….. I find it is not always possible to look at them as easily as single options because there is not a clear „buy-only“ or „sell-only“ transaction and I am not sure how to place a fair price when trying to execute …. have lost some good profits as a result!
Many Thanks,
Jason
(A)
Actually other way around Jason. When buying options, one must look at the offer, not the bid, and the reverse for puts.
Figuring out a nominal price when analysing any spread is just a little bit arbitrary. Rule of thumb in semi-liquid mkts: assume bid plus 75% of bid-offer spread to buy, offer minus 75% of bid-offer spread to sell.
It isnt perfect (sometimes not even close LOL), but for analytical purposes, this is a fair representation. One has to have SOME number to crunch, right?
Reasonably enough, in the very liquid mkts, CL, GC, ED, and so forth, you can probably assume close to the mid-point of the spread for both buys and sells.
When it boils down to actually making the trade, you simply must add your and your brokers experience together about pricing orders in THAT particular mkt. They all differ, one from another, as to ease of execution… and this is unfortunately always in flux, too.
Tom