How are Options priced in the simulation?

Most options are highly volatile and face liquidity issues (not enough people are trading them to create a stable price). This holds true in the real world and is further exponentiated in the simulation.

Options are a unique asset that worthwhile learning (especially through simulation, as it is very easy to make mistakes with options). However, if you are in a challenge looking to maximize your rank, options are a major wild card and are very difficult to predict (especially in our simulation).

Remember: How are trades executed in the simulation?

Tesla Option Example:

  • Buy / Cover-short orders are placed at the BID (In this example the BID is: $599.65)

  • Sell / Short orders are placed at the ASK (In this example the ASK is: $615.05)

  • Estimated returns (profit /losses) are calculated based on the "Last Traded Price," in the real world (in this example the "Last Traded Real-world Price": $435.05.

What this means is if you placed a market order to buy these Tesla options, you would purchase it at $615.05. However, when they show up in your portfolio they would technically be worth: $435.05, creating a fairly large loss. This is a liquidity problem, meaning that though clearly, the option is worth more than the last price, no one has purchased it recently to re-value the option.

Con: Your option value in the simulation is at the mercy of the "last traded real-world price."

Pro: Options are highly volatile, which means even if you take a disproportionate loss to purchase the option now, these tides can turn very quickly in a matter of days (sometimes even hours).

Remember these are problems one would also face in the real world, just further exponentiated by the simulation.

How did we do?

Does EquitySim have sample assignments for my curriculum?

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