Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 20

Did You Know You Can Actually Buy and Sell Your Options to Other People?

Nate pulled up additional option chains on his laptop screen. “Look at these chains for different months,” he said. “What do you notice about the relationship between time frame and the bid/ask amounts? I’ve helped by identifying one strike price over three months.” (See Figure 20.1.)

“Well, the bid/ask amounts are different for the same strike price in different months,” answered Shorty. “And that’s true for both calls and puts.”

“Specifically,” added Shorty, “the further out you go in time, the higher the bid/ask amounts get. Again, for both calls and puts. It’s just like we thought.”

“Yeah, but we were just speculating about what would happen if you and I were negotiating. This looks a lot more systematic than that.”

“And it is,” said Aaron. “The whole relationship between strike prices, stock prices, bid/ask amounts, and time frame is systematic—and complicated. But for now it’s sufficient to understand that time is critical in determining the value of an option . . . so you have to pay attention to it. Other things equal, the more time an option has before expiration, the more valuable it is.”

“There’s something else you should know at this stage of the game that is extremely important,” added Nate. “In fact, it’s the central fact that drives option trading. It’s the relationship between movement in the stock price and movement in the option price. Think, for example, of a long call. Let’s ...