I have recently started to trade options and am having trouble putting together the bid, ask and last prices. Let me tell you where I am currently at and please correct me if I got anything wrong.
- The ask price is the best price available to buy at while the bid price is the best price available to sell at
- The last price is the price at which the last transaction of a security took place
- Bid/ask prices come from market makers who offer to buy and sell at the ask/bid price instantaneously
- When I wish to buy on option, then I can either choose the current ask price as limit and have my order filled immediately or I choose a lower limit in the hope that the ask price will fall enough so that my order is filled
About the last one, I am not so sure. Do I really have to buy/sell at the ask/bid price? Or is it possible that transactions take place below/above the ask/bid price? Who would then be at the other end of the trade, a market maker or another trader?
Do bid/ask prices only reflect the best offers by market makers so that individual traders who might sell for lower/higher who do not influence bid/ask prices exist in the market? Is it possible that another trader is at the other end who might bid/ask different prices than the given bid/ask prices from market makers so that I can sell between the bid/ask spread?
What I am further having trouble with is reconciling the bid/ask spread with the last price. It is the last price a transaction of the security took place. But if that was entirely true, then me buying at the ask price or selling at the bid price would also be a transaction of the option that took place. How come it does not just switch between the current bid/ask prices all the time?
Furthermore, the last price always lies somewhere between bid and ask price. How did, whoever was involved in that last price transaction, buy or sell at this price whereas I can only buy at the bid/ask price? How can I buy/sell at prices between the bid/ask price?
Thank you very much in advance. These are probably rookie questions but I am really confused.