Switching from trading SPY to SPX can be an exciting move, offering opportunities in the world of options trading. However, as with any new venture, it’s essential to understand the nuances of the market you’re entering.
One SPX trader recently experienced an unexpected situation: the bid price of their SPXW call option briefly dropped to zero.
In this blog post, we’ll explore whether this is a normal occurrence in the SPX market and what factors might have contributed to this unusual situation.
The SPXW Call Option:
The trader in question was actively involved in trading an SPXW call option with a strike price of 4325 that was set to expire in six days.
This specific option represents a bullish bet on the S&P 500 index, allowing the trader to potentially profit from an increase in the index’s value.
The Unusual Event:
At 10:32 AM EST, during a market dip, the bid price of the SPXW call option momentarily showed as zero. The ask price, however, remained relatively stable at $16.00.
This meant that, at that specific moment, if the trader wanted to exit their position at the market price, they would have received a terrible fill due to the absence of a bid price. This occurrence was unexpected and raised questions about its normalcy.
Is This Normal for SPX?
To understand whether a bid price of zero for an SPX option is a common occurrence, it’s essential to consider a few key factors:
- Market Volatility: The S&P 500 index can experience rapid price swings, especially during volatile market conditions. When markets are turbulent, it’s not unusual for option bid prices to fluctuate significantly, occasionally reaching extreme levels.
- Liquidity: Liquidity levels for options can vary based on factors like expiration date, strike price, and overall market conditions. Less liquid options may exhibit wider bid-ask spreads, which can contribute to bid prices momentarily dropping to zero in extreme scenarios.
- Brokerage Platform: Different brokerage platforms may handle options differently. The trader mentioned that they use Schwab, and brokerage platforms may have variations in how they handle options orders and pricing.
While it may seem unusual for the bid price of an SPX option to drop to zero momentarily, especially in comparison to more frequently traded options like QQQ and SPY, it’s not necessarily abnormal in the context of the broader options market.
Market volatility, liquidity fluctuations, and brokerage platform specifics can all contribute to such occurrences.
As an options trader, it’s crucial to remain vigilant and informed about the dynamics of the market you are trading in.
Understanding the nuances of SPX options, closely monitoring bid-ask spreads, and being prepared for occasional anomalies will help you make more informed trading decisions.
In conclusion, while a zero bid price can be surprising, it’s not entirely uncommon in the world of options trading.
It highlights the importance of conducting thorough research and staying updated on market conditions to navigate the complexities of trading SPX options effectively.