Think Timely Price Quotes Don’t Matter? Think Again

Let’s say you’re a doctor working in a hospital. When the doctor is operating in the trauma unit, they need up-to-date information. Old information can be the difference between life and death. So imagine if they were making decisions for patients on information that was anywhere from hours old up to a day old. These decisions would cause hesitation and inaccuracy simply because the information is less relevant.

Removing the life-or-death severity of the situation, old vs. new data also applies to the options market.

All too often a stock or option trading service offers new trade ideas for investors. Or they screen for possible trade ideas that investors then use in the real world. But where do these services get their data, and perhaps more importantly, how accurate is it?

At Option Party, we use up-to-date information with minimal delay. It does investors little good to be trading off of old price quotes and information. For example, it’s hard to measure one’s risk and reward, say halfway or three-quarters of the way through Wednesday’s trading session, when the trade is still based on Tuesday’s information.

This fact should not be overlooked. There doesn’t need to be a 5% slide in oil prices to wreak havoc on energy stocks. Even on a “normal” day, shares could move 1% to 2% on seemingly small, company-specific news.

1% to 2% seems like nothing. Even in the short-term, 100 to 200 basis points of performance can be a blip on the radar. But when it comes to the options market, a 1% or 2% move in an underlying security can significantly change the option’s pricing. 

Back It Up — Stocks vs. Options

When an investor is sizing up stocks, there is only one main thing to focus on: Price.

For options though, price is just one of many factors to consider. When does the option expire? Is it in the money or out of the money? What is the volatility like right now and is it likely to increase, decrease or stay roughly the same? The process is very complicated. Do you really want to go through this each time you evaluate an option trade?

Given that so many variables effect option pricing, it’s even more important for traders to be working with fresh data.

That’s why at Option Party we use timely pricing, updated throughout the trading session. Admittedly, using day-old data can still be accurate and relevant the next day. But it’s quite unlikely, because in options even a flat move in the stock will impact the price of an option as volatility (likely) falls and as time decay erodes the price.

But the point is still the same: Inaccurate and old data feeds being used for pricing can cause big errors. Imagine if a stock falls by 2%, and we’re using old data. That option could easily increase or decrease in price by 30% to 50% or more. Again, that depends on a lot of other inputs. But the fact that investors could be reacting on that information is very concerning.

A Real-Life Example

Let’s look at a real-world example here to show the true differences in what up-to-date pricing vs. delayed pricing can mean.

Taken in a screen shot from Option Party’s screening software at 10:25 a.m. ET on Friday is a trade on Nvidia (NVDA). It’s a neutral to bullish play that involves selling the $121/$116 bull put spread.

To read about bull put spreads, see our article here.

Initial trade data from Option Party

The initial trade

In selling that $121/$116 pull put spread, we were set to collect 18 cents. But by the end of the day, we couldn’t even find the trade on Option Party’s service because it no longer showed up in our same risk-reward parameters.

Does that mean the trade was bad? Actually, it meant that it had moved too far in our favor. In this example, by the time the market was nearing the close on the same day, this particular spread was only selling for 11 cents. The gain of just 7 cents may seem small, but on a percentage basis, represented an increase of 38.8% — intraday!

Price quotes example

The trade just a few hours later

This drives home the point even more. A trader using old data may have still entered that trade near the end of trading Friday. Thanks to outdated information, one of two things would have happened, both of which are bad. First, the trader wouldn’t get a fill if they tried to collect the 18 cent credit for each spread they sold. Thus, they would have missed out on one-day profits of 38%. Second, they could have asked for a fill at the midpoint, which we just saw was 11 cents.

This puts the risk-reward at a less favorable position. Essentially, it’s asking the trader to take on the same risk while simultaneously accepting far less reward. If they were filled at 11 cents and the spread went back to 18 cents — the original entry from Option Party — they would be sitting on a 63% loss.

The Bottom Line on Stock Price Quotes

A few minutes can make a difference in trading, but not nearly as much as a few hours or even a full day can. By using up-to-date pricing, traders not only increase the likeliness of success, but also reduce their odds for failure. Along with making our risk/reward more attractive, that’s always the goal.

Also Read

How (and Why) to Set Up a Collar Trade

How to Use a Straddle Trade

Cash Secured Puts vs. Covered Calls