Understanding Option Bid vs. Ask -- How do you know what you'll get?

I'm interested in making some option plays but I'm confused about Bid vs. Asks and the actual price of an option. I've been told that usually the difference is split between the bid and the ask and this is what you'll typically get.

So for example:

The June 18th $18 dollar put was last at $0.79. The Bid is $0.67 and the Ask is $0.80. Adding the two together and dividing by two = $0.735 (call it $0.74). Clearly the last trade was higher than the bid. Why?

Now for another example that confuses me further, what happens when the bid is 0.00?

As you can see, the June 18th $3.00 put has a Bid of $0 but an ask of $0.15. If I wanted to write a $3 Put, would I get $0.15/share?

Sorry, I should have specified that I'm only interested in selling puts and calls. If the bid is $0, what recourse do I have? Can I open a starting bid?

The benefit is safety. I'm trying to make OTM Puts that are essentially worthless just for the experience of writing an option. Even if I net out a break even position or come out ahead by a dollar, it's still a thrill for someone like myself who hasn't traded a single share of stock.

Quote:

Originally Posted by StockJock-e 

Typically you dont want to be selling stuff that has no volume. There is a reason there is no volume on some of those strikes. If the trade goes against you and you want to buy to close the position, you will get raped on the spread.

 

You can still do it, just place your  trade sell to open and the price you want to sell at.

I'm looking to sell a put option on a stock I wouldn't mind owning. So I'm actually hoping to collect the premium AND have the stock put to me, rather than buying the stock outright. If the bid is at zero and I still place a trade for sell to open at .15 for example, do I have to wait for a buyer before the order gets executed? I don't understand how this part works exactly.

Also, if the order never gets traded, will I still pay the trading commission?

Quote:

Originally Posted by BobK 

Do you mind if I jump in here? I'm hoping Gil will reply because I'm saying if there is no 'buyer' you can't sell. I'm new at this also.

 

 
No, I don't mind.

I imagine you're correct, but one can't function without the other, right? Volume has to start somewhere. So why couldn't I start the bid? I understand that a sale may not take place, but how would it if no one is offering it anyway? Similar to selling a dvd, if it's not on display, of course it won't sell. However if it's up, perhaps (maybe/maybe not) a buyer will come along.

Does this make sense?

I couldn't wait for a response, so I asked my broker via chat. Basically, my assumption was correct.

I'm trying to get 100 shares of TWO - Two Harbors Investment at $10/share but it's currently trading at $10.50. I want to write a July 16 Put at $10.00. It's current bid is $0.00 and the ask is $0.35. Zero volume. The broker said I could sell to open the option, with a bid of my choosing, and wait for a buyer. There would be no commission payable if the trade never transpires (ie, a buyer never comes). However, the risk is that I may not be able to close out my position. If the stock plummets to pennies on the dollar, and there's zero volume, I may not have an exit strategy.

It's doubtful that this will happen, and for my purposes, I want the stock. It pays a nice dividend that I can later write calls against.

Stockjock-e, is this a bad play? I want to play in the sand with options but I want to make conservative moves. I only have $1100 to play with.

So apparently my lvl 0 schwab option trading account allows the purchase of "covered puts" but not the sale of them. I tried to sell the RSO July 16th $5 put but was blocked due to limited access. I've got the funds in my account to sustain assignment so I don't know wtf the problem is. LAME. I'm going to pull my funds and bail. Maybe I'll go with Options House brokrage since they allow me to write "cash-covered" puts.

I now realize the difference between bid/ask. Like the mod said, if I'm selling, I'm ASKING. For some reason I had that confused.

I suppose I could still list something with 0 bids and wait, but the only risk is that it doesn't execute. No big deal. Not sure why that's an awful play, it's only lost opportunity, not an actual loss per say...