I'm looking at options chains for SPY for some particular expiry date.

I'd expect that the last trade prices would vary smoothly with the strike price.

But they don't; there are occasional puts that seems especially cheap. That's ok; if I'm not particular about the strike price, then I look for these and buy them.

Is there some particular reason for this unevenness, other than perhaps lack of liquidity? Note that SPY is apparently the most widely traded option.

Why don't arbitragers step in?


1 Answer 1


This is a case where a snapshot of the quote page would make good sense.

enter image description here

As you can see, even though I tried to choose a range of strikes that were active, around the current price, the volume isn't really impressive. One option at $6 is a $600 trade, so even the 40 volume is less than $40K dollars. With little volume the bid/ask can easily go stale. If it's the 'last' that you are focusing on, it could very easily have been a trade early in the day.

If I understand your question correctly, the answer is, "if you got a current bid/ask for a series of strikes, indeed they would cluster around the theoretical nice curve you expect. I believe the bid/ask would straddle the line very neatly. But at any moment, the last sale or the stale bid/ask won't reflect that curve. If you see a bid/ask that looks advantageous and try to place a real order the bid/ask will quickly update to reflect reality."

  • As long as the market is open, the bid/ask is never "stale" (except for any latency in transmitting data from the exchange to the customer). By definition, the bid/ask reflects currently pending buy and sell limit orders (the highest buy and the lowest sell). While the bid/ask may have a wide spread, it is always fresh no matter how illiquid the option. If you see a low ask and enter a matching buy, then once your order reaches the exchange, there is no opportunity for the ask to "update to reflect reality" -- the order will be be matched immediately, no backsies. ...
    – nanoman
    May 2, 2022 at 0:29
  • ... It is the responsibility of traders (including market makers) to modify or cancel their limit orders if they no longer wish to trade at the price they previously specified. For illiquid options, the bid/ask are typically set by market makers, who must update the prices frequently even in the absence of trades, precisely to avoid being "picked off" if the fair value of the option gets outside the bid/ask. Indeed, you can see in your snapshot that the bid/ask prices follow a much smoother trend than the last trade prices. OP's question was specifically about "last trade prices".
    – nanoman
    May 2, 2022 at 0:30

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