How are the opening stock market option prices determined?

Question

If every single bid were to buy or sell at market, would yesterday's close be chosen as the price?

If there were only two offers, a bid of $1.10 and an ask of $1.00, would $1.05 be chosen as the transaction price, giving both sides a nickle more than they expect?

Is the best idea to wait until the day when you can see the bid and ask prices so that you don't get a worse deal than the market would be willing to take?

Answer 1

<<<How are the opening stock market option prices determined?>>>

The opening bid price quote and the opening ask price quote are determined by a process known as an "opening rotation" in which all the market makers for a stock submit their quotes. This used to be a fairly lengthy process and frequently options on a stock would not start until several minutes after the stock started trading. In 1999 the CBOE introduced the "rapid opening system" which reduced the time to open options on a stock significantly.

The opening trade quote is the price at which the first trade takes place.

<<<If every single bid were to buy or sell at market, would yesterday's close be chosen as the price?>>>

That is not possible since trading is not opening until the market makers have submitted their bid and ask quotes and every market maker must supply both a bid and an ask quote. A market order to buy would be filled at the lowest ask price; a market order to sell would be filled at the highest bid price.

<<<If there were only two offers, a bid of $1.10 and an ask of $1.00, would $1.05 be chosen as the transaction price, giving both sides a nickle more than they expect?>>>

Once again that is an impossible situation since there are multiple market makers for each stock and every market maker must submit both a bid quote and an ask quote for each option on that stock.

<<<Is the best idea to wait until the day when you can see the bid and ask prices so that you don't get a worse deal than the market would be willing to take?>>>

I have seen several experts say that is true, and I follow that advice. Some even go so far as to recommend not trading options during the first hour of trading to give the market time to adjust to overnight developments.

Answer 2

You should never rely on a closing price to place a market order for options while the markets are closed, because things can influence option prices significantly before the markets open.

I read a post on a free legal site from someone trying to figure out what to do after he placed a market order at night for 100 contracts of an option that closed at $0.60.  A buyout was announced in the morning, he was not watching. and his order filled at more like $5.40.  By the time everything in his small account was sold, he had a margin call for $35,000 (ouch!).

Answer 3

1) The first chart price of the day is the first completed deal of the day.

2) I believe the market intermediaries (brokerages) eliminate those opportunities.

3) You should do your analysis on the company.  If you can buy at the price you believe is better than the stock's value, at your required rate of return, then you already agree that it is worth it to buy.  To wait for a better price would mean that you require a better rate of return.  

You can't make a rule about bidding off-hours like that.  It would be like a gambler's rule, not an investor's rule.

Answer 4

If you are an end of day trader you can use last close option price a guide.

if you want to enter into position after you have done your analysis you can place limit order using the mid point as you mention in your example is fine, once your get in manage your risk.

If you can watch the 1st hour of the opening or closing it's better, but not every body can watch the market during working hour.

Hope it helps and good luck.

Cheers