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.

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