This has probably been addressed but on multiple occasions, I have seen EOD option quotes with crazy wide bid/ask spreads. I'm especially curious to hear from some institutional folk why this might happen? Thanks!
Too many to list, but EOD or near EOD. No MM wants to take on risk they are unable to hedge by EOD or the only hedge is stock which can also be illiquid as the close approaches. Generally, the cheapest hedge for an option is another option. You also get some non-primary MM's who drop of as the EOD approaches and that will widen markets as primary was what the smaller non-primary lean on. So depending on the underlying and the number of venues it trades on you want to be cautious near END.
That makes sense. What is another potential reason (or two)? Also, what about data from 3:55 PM ET rather than 4:00 PM? I would think this to be smack dab in the middle of the most liquid part of the trading day. Should quotes at this time be most reliable?
You will have people put in bids and offers to mark their book. If you are long an option you might put a bid close to mid to push the new mid up and get a favorable mark.
As a past market maker and backer of market makers, I echo ajacobson and newwurldmn adding that there are many firms that have algos trading stocks and some options near the close that will create additional volatility near the close. We take a snapshot of markets 14-minutes before the close. We subjectively picked that time as most representative of the true markets before the EOD shenanigans start. Here's a picture of this past Friday SPY falling right before the close.
Are you suggesting this might have been EOD shenanigans? Volume is usually highest in the last 10 minutes though, right? Are prices on the greatest volume the most representative?
The main reason for such crazy wide bid/ask spreads is the market volatility. Basically the trading volume determines the bid/ask spread size. So it can be a reason too.
I am suggesting that representative options markets are better reflected well before the close. Many firms trade large size on the close. One of our clients trades like this. It makes it very difficult to hedge an options trade when the volume is so great in the underlying. There are methods for notification of imbalances on the close and that information sometimes makes the options markets look odd.